Not long ago, I gave an address at our 24th Retail Energy Executive Forum themed “Navigating Competitive Intersections.” As the energy business continues to grow in complexity with new technology and new market entrants every day—to really succeed—we must fully understand how the shifting fundamentals will bring change to the competitive landscape we’ve navigated to date. But we also need to remember value has already been created in the utility business model, and this will not disappear overnight in the face of a challenge. In fact, it’s often this base of value that brings huge competitive advantages to navigating new competitive intersections.
Throughout 2013, there was big talk in the energy industry around how the electric utility business model is mortally threatened by the growth of distributed energy resources (DER). While Mark Twain may have never really said the phrase “news of my death has been greatly exaggerated,” I don’t think any phrase could be more appropriate to apply to this talk of a utility death spiral.
Don’t get me wrong, a shift is clearly underway and those that fail to evolve in the face of it may well find themselves supplanted. I made mention of the opportunities and potential growth in this space just over a year ago in my article titled “the self-optimizing customer revolution.” You’d have to be living under a rock not to have noticed that rooftop solar has been the fastest growing electricity segments. SolarCity alone grew by almost 250% in 2012, according to public filings. And while it’s not there in raw numbers compared to grid delivered energy, or even solar, fuel cells and micro-turbines, combined with cheap shale gas, represent a significant shift as well. And it’s only likely to accelerate.
It’s in this light that I’m focused on a future world where “over-the-top” options go from science fiction to everyday reality; where new players from the digital world begin to take on the role of meeting customer’s energy needs as part of a broader solution. Soon we may live in a world where transacting energy every day becomes as easy as trading stocks with e-trade or sending money with paypal—or maybe easier.
The interesting part of this paradigm shift is consumers are looking for trusted partners to help them move through the new gamut of options they face. While some new brands have started to emerge, like Nest, Tesla and SolarCity, many legacy energy companies are embracing change, and will certainly have an advantage when it comes to customer acceptance and trust. The key question to ask is: Who will customers turn to when they think about buying solar and connecting their electric vehicle? Moreover, who will they turn to for help optimizing the use of those when they want enhanced reliability?
We don’t know yet if these new entrants are here to stay as only time will tell if their individual business model is sustainable. We do know, however, that the services they are offering still substantially depend on the infrastructure and core business model electricity utilities have, for the most part, reliability delivered for over a century. That’s not likely to change in the near, or even medium, term.
So looking out at the future of the utility business model, some key elements seem to be taking shape. We are seeing active movement to a more involved role in developing economic signals for these new distributed technologies. Demand Response (DR) is clearly the first move for many utilities looking to engage customers with new technology. The evolving role for local utilities might well begin to take the form of a market facilitator for distributed resources much as has evolved in many places with regional wholesale market operators. We’ve been working with our clients examining this sort of opportunity. Just imagine the interesting market that might emerge if local utilities served as a market maker for those thinking of investing in DER technology like solar, DR, or other emerging options. The role as market maker might well become even more important than the historic network builder and maintainer of the past.
So, as we contemplate the future of electric utilities we can’t lose sight of the central role they play with consumers and with infrastructure. While we don’t yet know exactly how these changes will take shape, what we do know is the role of utilities remains crucial in facilitating the adoption of these new technologies. Utility death spiral…not so fast.
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Jeff Bladen has more than 16 years of executive management experience in the energy sector and serves as leader of DNV GL’s Markets & Policy Development practice in the Americas. This practice spans the company’s extensive retail and wholesale market strategy, market intelligence, and regulatory policy support for clients throughout the energy value chain. Learn more on our contributors page.