Electric utilities have been experiencing disruption to their business models for several years now. Perhaps the disruption is not as stark as Uber to the taxi market or Amazon to box retail, nevertheless the disruption is real as are impacts on rates and profitability.
For generations, the utility business model has been straightforward: Deliver a highly reliable product, recover the costs via regulated rates to consumers and make a fair, yet regulated profit. Let’s list a few key steady drips of disruption to electric utility business models that have resulted in either lower demand and revenue or higher costs.
Lower Demand: Renewables, Energy Efficiency, Demand Response
Higher Costs: Labor, Infrastructure, Smart Meters, Technology
Obviously, utilities have to invest in the cost items to maintain high reliability and operate the business. While one hopes the smart meters and technologies will eventually drive costs down over time, there is no guarantee of the risk reward of these investments. In the shorter term these investments and rising costs require increased consumer rates. Increasing rates drive consumers to initiatives and behaviors that result in lower demand. Some call this phenomenon the utility death spiral.
Personally, I don’t think death spiral is the right buzzword for this. The reality is consumers are always going to need electricity and until someone figures out how to deliver it in mass volumes to every consumer without using transmission and distribution wires, it will stay that way. While I don’t have a replacement buzzword (I know, unusual for a consultant), I do think the timing and opportunity for utilities to redefine their business models is now.
Much has been written and talked about regarding decoupling. I am a fan of this concept that separates reliability and delivery from commodity sales, however, I don’t think it goes far enough, nor do I think utilities will make more money because of it. Mostly it’s a way to reduce or redefine financial risk. Decoupling doesn’t result in redefining the basic business utility business model.
When you look at every other disruptive business model they all start with the same thing: Choice. Consumers are provided with a new choice on how to procure or use something in a different way.
Some utilities may argue they provide choices because they have a variety of energy efficiency or demand response programs for consumers to choose from. While true, I would argue that it’s largely not the consumers who are choosing these programs, rather it’s the vendors and service companies who bundle the EE/DR and rebate programs into their project or product sales. I would also argue that demand program choices are but the tip of the iceberg of consumer choice options a utility might offer.
Let’s play the “what if?” game.
What if utilities sold demand programs directly to consumers on an all in basis and subbed out the installation to contractors?
Utilities could then bundle different programs into consumer-friendly packages, add a dash of technology and possibly offer financing (maybe on the bills). This concept would drive higher customer participation, provide better energy utilization data and customer behavior information as well as increase profitability via margins on installation, finance, technology, etc. Currently, consumers are faced with a dizzying array of choices among technologies and the very fragmented installation vendor market. The utility brand is already trusted by consumers and much stronger than the various vendors, plus the technologies deployed are sure to work cohesively with utility systems.
What if consumers who wanted to choose their commodity price could select from a variety of pricing options from their utility?
In some markets with competitive retail markets this already exists to some degree, depending on the market. In markets other than Texas, those utilities with retail choice currently just provide tariff pricing with a monthly or quarterly adjustment. This results in consumers either choosing a single price program from the utility or from a menu of price programs from retailers.
In this what-if scenario, utilities with or without retail choice could develop several commodity pricing programs, for example fixed one-year full requirements, fixed one-year blocks with floating for balance of load–the list of possibilities is long. To mitigate price risk, utilities could bid out the actual supply to either wholesale marketers or existing retailers. Net result is utilities offer consumers choices, retain customers and mitigate both price risk and generation risk for those who own generation.
What if all the money currently spent on consumer education and outreach programs wasn’t a cost center, rather a profit center?
For the most part these programs appear to be focused on increasing JD Power scores, justifying smart meter investments, consumer awareness or some sort of “customer engagement” initiative. In a non-regulated business, these same types of programs would be considered marketing and be measured by sales and profitability. In other words, they are expected to have a return on investment (ROI). Perhaps utilities could look at them in a similar way, especially if they expand consumer choices they offer.
Disruptive business models for utilities are most likely going to be focused on their service territory, unlike those who transform national or global businesses such as Uber and Amazon. The exception is utility nonregulated businesses that venture into national or global markets.
These examples of “what if” are but a few of the many ideas and possibilities. Starting down that road toward redefining the utility business model is a process that starts with defining the art of the possible, then testing the various concepts against internal capabilities and gaps as well as testing with customers and regulators. From there the planning and execution required becomes much clearer.
While the path to redefining the utility business model isn’t easy, the path of doing nothing may be much worse.
About the author: Peter Weigand is the chairman & CEO of Skipping Stone, a global energy consultancy providing strategy, market assessment and strategy implementation services. Peter has worked with numerous clients to develop and implement new business models. He has been named an Ernst & Young Entrepreneur of the Year and the company was named Global Energy Consultancy of the Year by Global Energy News.