Our blogs Blogs home
Energy in Transition

Energy in Transition


The future of Distributed Energy Resources in retail markets: What’s next?

The 2014 Retail Energy Executive ForumTM brought together leaders in the retail energy industry to facilitate discussions about differentiating between price and non-price products and services, retail and wholesale price and contracting dynamics, the role of M&A, and partnerships in retailers’ growth strategies, while also addressing potential scenarios that may evolve in an incredibly competitive environment with compressed margins and no new competitive markets expected to open in the foreseeable future. Participants shared their perspectives on forecasts, trends, and customer relationships, while also generating excitement about the potential paths forward for competitive retail energy markets.

The Forum included a special workshop on Distributed Energy Resources (DER), during which we discussed DER as an inroad for products and services—which may or may not include an industry partnership. To gage the current state of DER, we surveyed Forum participants to learn which phase they were in. The results shown below in Figure 1 indicate that nearly 60% of the audience had already formed a partnership to address DER; only 20% of the audience was not currently considering a DER product or service.

Figure 1: Regarding Distributed Energy Resources, which of the following applies to your company? Source: DNV GL

Figure 1: Regarding Distributed Energy Resources, which of the following applies to your company? Source: DNV GL

As customers increasingly install generation behind the meter, the fundamental role of the competitive retailer is to offer commodity changes, since the customer can self-supply some or all of their energy needs. A consensus among the Forum was that DER represents a challenge to the business-as-usual model, with opportunities to reconsider the relationship with the customer and how to meet their evolving needs.

Participants emphasized the strategic imperative to create enhanced customer value. In a live poll during the Forum, 50% responded that the primary outcome of a partnership should be to expand and maximize the lifetime value of the customer. In recent and emerging solar PV partnerships, PPAs with a 10-25 year term have the potential to fundamentally change the customer retention and churn dynamics that often characterize a purely commodity-based customer relationship.

An important aspect is how retailers brand (and in some cases, co-brand) themselves when they are considering a partnership as a means to deliver greater product/service value on the things customers want. Decisions around whether to co-brand or not, whether to bundle services, or customize, are difficult to generalize. Alignment between the business objectives of the partnership and the customer value is essential to make sure the partnership is achieving the established goals.

Core considerations around products and services (either DER-related, or other demand-side offerings around energy efficiency and load management) included:

  • Risk management – which state and/or federal policies, wholesale pricing dynamics, and competitor initiatives need to be considered when you examine the risks and opportunities to adding or enhancing your product/service strategies?
  • Customer targeting – for which customers (and in which geographies) do new or enhanced products/services make the most sense to achieve your goals?
  • Productizing – what approaches to bundling products/services vs. customizing allow you to acquire and retain customers?
  • Branding and communication – what approaches should be reconsidered, revised, or enhanced to connect the value of products/services to customers?

What’s Next?
A crucial factor to success for these deals is the structuring partnerships (pricing and financing) behind them. The audience poll during the DER Workshop indicated that having replicable finance models (35%) and demonstrated customer successes (30%) were the most important aspects to DER becoming more compelling in competitive retail markets in the future.

There will undoubtedly be a mix of first adopters, where models are developed and evolve to resonate with customers, and “fast followers” waiting to see how the early efforts progress before they make a determination to replicate or adapt any early approaches. In those cases, as was discussed during Session 5 (“Big Movers: Keys to Market Success”) and Session 6 (“The Art of the Deal”), some retailers are opting to stay focused on their core strengths or do not fully understand the cost structure of new products/services. This can create a blind spot in the full “cost to serve” consideration and ties directly to effective hedging. Panellists also noted caution when considering and evaluating potential risks in making big business strategy changes where you might not have fundamental expertise.

Retailers are investing substantial time, energy, and funds to develop products and services that resonate with customers. In Badar Khan’s opening keynote, he challenged the industry to consider whether it has truly lived up to the promises of competitive markets by offering things that were truly different from the regulated utility to make a meaningful difference in the lives of customers. The Session 1 (“The Big 5: Retail Executive Insights”) discussion, intuitive interactions that are shifting to self-service with the customer were addressed. Personalization and customization of those interactions to connect to how customers can save money or have clear, actionable information about their bill to make choices was underscored.

However, developing innovative solutions and services represents capital expenditure for longer term value, relationships, and—if the strategy resonates—financial health of retailers. Finding that balance between long and short term investments and customer value is the core strategic debate underway throughout the industry.


0 Comments Add your comment

Reply with your comment

Your email address will not be published. Required fields are marked *