Rapidly-evolving technology, changing policies, and a shift in consumer expectations are putting pressure on the energy sector worldwide. As a result, this once unshakable bastion of profitability is now seeing a decrease in its revenues in established markets, while developing areas are struggling to meet demand.
These challenges open up many opportunities for those willing to adopt new business models. Deregulation is gaining steam across the world to break up monopolies, foster competition, stimulate renewable energy production, and ultimately, lead to better services and lower prices for consumers.
At the same time, “a broad partnering approach that leverages the existing market expertise of others” is seen as a way for energy providers to keep up with the frenetic pace of change, and the need to transform their customer-facing services.
The lay of the energy land
Concern for the environment, costly dependence on fossil fuel and its dwindling reserves, and the need to sustain population growth and economic development are some of the key factors shaping the energy landscape today.
In the EU, most markets are now fully deregulated, but the demand for energy is decreasing as a result of “energy-efficiency and decentralised generation.” In the US and Canada, the market is partially deregulated, depending on the State/Province and type of energy, allowing for more competition, but there too, demand is declining.
In Brazil, demand continues to rise, but the country faces many challenges. Hydroelectric production, which accounts for 70% of its electricity, happens in the North West but highly populated areas lie almost 2,500 km away to the South East. Additionally, 82% of future energy development projects are located near Indigenous or protected lands.
In South Asia, the potential for renewable energy is high but the lack of infrastructure, the volatile political climate, and the large proportion of consumers living below the poverty line are impeding developments in energy production and distribution, according to the Energy Trade in South Asia report.
In China, an increasingly deregulated market aims to push out producers still relying on polluting and inefficient production methods and sources, such as cheap coal, but the shift is not without difficulties, explains Engerati. The gradual pace of reform, which begins with local or regional pilot projects that are then deployed at large, and the sophistication of new systems are causing headaches.
For example, even though China has invested heavily in wind and solar energy, they “are being under-utilised under the current system, which is too static to effectively incorporate fluctuating green energy generation rates, resulting in waste and the threat of power cuts,” says Engerati.
While countries around the world are at varying stages in their energy development, there’s a clear focus on renewable energy, according to KPMG’s Global Trends in Renewable Energy report. “This is driven not only by energy security and diversification considerations, but also based on environmental considerations, global commitments, renewable technology development, and strong sector appetite for green projects.”
Energy in a deregulated world
Increased choice for consumers
For consumers, deregulation can sometimes lead to lower prices, unless the move is accompanied by a push toward renewable energy and infrastructure building that offsets the savings brought on by increased competition. Lower prices are especially important in countries where a large proportion of the population lives under the poverty line, like in India.
It can also enable individuals to become small energy producers thanks to new technologies, which have greatly reduced the cost of equipment such as solar panels and wind turbines.
Increasingly, the “grid is changing from a one-way, top-down network to being two-ways and bottom-up,” explains Ben Schiller from Fast Company. “In the future, the transformation is likely to progress even further, with more of us participating, and some of us even collaborating in “peer-to-peer” relationships.”
In the Netherlands, this scenario is already a reality with Vandebron, a tech startup, enabling individuals to cut out large energy providers altogether. Small producers can use the company’s website to sell their surplus of energy at a better price than what the local utility is willing to pay them. In turn, they connect with buyers and provide hundreds of other households with energy, at a lower price because they don’t have to swallow costly expenses.
In California, Community Choice Aggregation programs mean residents can choose to receive some or all of their energy from clean sources. “The program keeps costs down by buying directly from several small, local energy projects it helped develop,” explains Cheryl Katz, “as well as agreements with commercial solar, wind, and geothermal producers.”
Broader access for governments
Governments can also greatly benefit from deregulation. In developing markets such as Asia and Southeast Asia, it opens the door to investors who can help build the infrastructure needed for large-scale energy production. For example, in India “nearly $100 billion of investment will be needed for renewables, largely solar, over the next five years,” according to Ernst & Young.
Local and regional governing bodies can also trade any surplus of energy, thus avoiding waste and creating revenue at the same time. While still limited, there’s a growing energy trade between several countries in South Asia for example, such as electricity between India and its neighbours, Bhutan and Nepal.
Double-edged sword for producers and providers
For energy producers and providers, deregulation can be a double-edged sword. While it enables them to access new markets, where demand is still growing and investment in infrastructure is welcome, it can also have a negative impact on renewable energy initiatives.
Brazil for example, is well-known for its production of ethanol from sugar cane. The government is a key player in the success of the sector, which it helps by dictating, among other things, the percentage of ethanol that must be blended with petrol sold on the market. It’s unlikely however, that the ethanol industry would thrive in a deregulated market where consumers can choose higher performing fuel.
Overall, the energy sector is becoming more complex by the day. To succeed in the transition, energy companies will have to chart a course in a global environment with varying national and multinational regulatory arrangements, and a push toward renewable energy production. But primarily, they’ll have to become “more customer-centric and reliant on customer interactivity, according to PwC’s Customer engagement in an era of energy transformation report.
Shift in consumer expectations
For many years, utilities were considered an inevitable expense by consumers who were hesitant to switch between providers, often fully or partially state-owned. Now that affordable alternatives are growing by the day, consumers have a fresh new set of expectations.
“In the future, regardless of competition, the challenge will come from customers having less need of traditional utility companies for their power,” according to the PwC’s report.
A new breed of consumers
In the past, customers were satisfied when their concerns for “reliability, safety, pricing, information, and resolution of any problems,” were met, explains the PwC report. But in recent years, they’ve been spoiled with online experiences in such areas as “retailing, travel and media”, which have raised “the standards expected” from utility providers.
Today, they want “choice, flexibility, real-time information, personalized insights, and high levels of customer service,” says Thunderhead. But that’s not all. While consumers’ concerns for the environment and low prices are triggering a demand for more energy efficient options, their busy lifestyle means they want automated services that guarantee them savings without having to intervene.
A survey by SmartEnergy IP found that one third of consumers “expected their utilities to implement technology that would automate energy savings” and 10% said they wanted to be able to access all these services using a mobile app. In essence, customers are demanding the same conveniences they’ve achieved in other areas of their lives.
Smart infrastructure will ensure constant connection
The Internet of Things and platform-based interactions are now making consumer demands more realistic and could provide utility providers with a way into their customers’ everyday lives, as well as providing a strong selling point to entice new generations of technophiles like Millennials.
KPMG even predicts a future where consumers could purchase energy from their provider on-the-go anywhere in the world, thanks to “a combination of deregulation and technology,” with smart grids linking them “to the most cost-effective source of energy.”
But providing “a seamless and consistent customer journey across every touchpoint and integrating the technology necessary to do so is one of the greatest challenges facing utility companies today,” says Thunderhead. This is especially true considering they have to compete in this area with tech startups with a finger on the pulse of consumer expectations, which are now offering alternatives to traditional consumption patterns and habits.
Partnering for success
Improving on strengths
In more mature markets, energy providers have worked hard to develop widespread and reliable networks of services over the years and can bank on their strong brand, well-trained and trusted workforce, and existing billing relationship with customers. For a long time, these elements were sufficient to increase revenues year after year, as many players benefitted from a quasi-monopoly, but that’s no longer the case.
As we saw, consumers are starting to have more options when it comes to managing their energy consumption. They can now call upon a network of companies that offer energy-related, consumer-friendly products and services such as home repair/service assistance, comparison engines, and smart home devices, to name only a few.
A study by Accenture illustrates the dilemma well. On the one hand, it shows consumers view utility providers as the first port of call when it comes to advice and support on electricity management programs. But on the other hand, consumers admit they tend to trust the advice of environmental, academic, and consumer groups more than that of the provider, highlighting a significant missed opportunity to develop a dialogue.
Energy providers should view this as a golden opportunity to partner with new players to extend their reach into customers’ homes where they can better engage them. And some have already responded to the challenge. Dutch utility Eneco for example, created Crowdnett, a business which buys back stored energy from customers’ homes, and Toon, a device which enables customers to manage their energy usage more effectively.
While initiatives such as this may reduce sales of electricity, they demonstrate new business models aiming to develop longer lasting relationships with customers. Quby, the manufacturer of Toon quotes results of 60% less churn for Eneco.
Good old reliable service still key
The most important thing consumers want from their utility provider remains good and reliable service. Even when customers are satisfied with the way their provider solved a complaint, they’re 72% more likely to feel less satisfied overall than if the issue hadn’t arisen in the first place. Unfortunately, customer service is not always a utility provider’s greatest strength, as their focus is often on the bigger picture.
Here again, partnering with a home assistance network could be a solution to boost customer satisfaction and humanise an energy provider which may seem too large and remote to care. Not only can the provider shift the burden of responding to customer service requests within the home, but they can also offload the responsibility of creating innovative services in line with today’s customer expectations.
These services can fill a gap in insurance coverage when it comes to repair, but also provide installation services, a platform to find tradespeople, and solutions for connected homes. As a result, energy providers can focus on what they already do best; creating and maintaining core and innovative means of harnessing, storing and distributing energy.
In some countries, like Brazil for example, partnering with a home assistance service could even open up the door to a brand-new market since there are very few such well-organised services at the moment.
Initial results from an upcoming HomeServe survey in Brazil show that 79% of respondents would be very interested in a membership that gives them Home Emergency Coverage, which would include such things as maintaining and repairing main electrical and heating/cooling systems.
The survey also found that 82% of respondents find the idea of a Home Expert website “quite” or “very” appealing.
The future looks bright for those who dare
There’s no denying the challenges facing the energy sector today and in the future. Up until now, providers have been focused on balancing the effects of deregulation with the maintenance of traditional technologies, which still account for a majority of energy resources in most countries, and the development and implementation of renewable alternatives. As a result, its understanding of the evolving needs of customers has often taken a back seat.
This has opened the door to a supporting ecosystem of companies that offer niche products and services to consumers such as home assistance, comparison engines, energy exchange platforms, and smart home devices, to name only a few.
While on the surface these nimbler, more consumer-friendly services may appear to be disrupting business as usual for utility providers, they also present great partnership opportunities that could strike the perfect balance between meeting the needs of their shareholders and those of customers.
Ultimately, it’s hard to predict what the energy industry will look like in 10 or 20 years from now. At the moment, it’s being reshaped by a number of important factors and, according to PWC’s 2017 Power and Utilities Trends, it will favour “utilities that grow beyond their traditional business model to build a market-based technology and related services portfolio” that listens to the new relationship customers are hoping to build with their energy providers.
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