Navigant Research Blog

Shell’s Acquisition of First Utility Augurs a New Wave of Competition

— January 16, 2018

At the start of 2018, a warning shot was fired across the utility industry’s bow: competition is showing no sign of abating. If anything, competition is actually heating up. The nature of utility industry competition has changed dramatically since the start of the decade.

If we rewind 5 years, utilities’ biggest competitors were other utilities. Telcos and high street retailers posed a moderate threat, as some showed an interest in the addition of energy supply to existing, mass-market services such as mobile and fixed-line communications, broadband, pay-TV, and financial services.

Telcos Contemplating Market Entry

Over the past decade, I have advised numerous telcos on opportunities in energy, some of which have moved into the space. Most of the market movement has taken place in collaboration with utilities, which essentially whitelabel energy supply. However, the impact of telcos on the energy industry (and vice versa) has been underwhelming. Why? Because there has never been an imperative for telcos to sell energy, or utilities to sell telco services. It’s a nice-to-have add-on that may help reduce customer churn, but little else.

EV Growth a Clear and Present Danger to Oil Majors

The present day competitive environment has shifted significantly. Utilities face new threats from new entrants with a significantly greater reason to enter the world of energy services. Nothing underlines the shift in competitive pressure more than Shell’s acquisition of the UK’s First Utility, the first major energy supply business to be acquired by an oil major.

This acquisition should come as no surprise to anyone monitoring the energy landscape. My last blog of 2017 called on utilities to improve their peripheral vision and monitor competitive threats. It seems that many oil majors have a more mature peripheral vision, and are already acting to mitigate future potential risks to their core business.

The shift to EVs causes significant concern for oil majors. By Navigant Research’s reckoning, plug-in EV sales in 2017 exceeded 1 million for the first time; the significant investments in recharging infrastructure and increasing concerns regarding the pollution of internal-combustion engines will only accelerate the shift to EVs. Any oil major extrapolating EV adoption to an extreme scenario of ubiquitous EVs will recognize the potential disaster for service station businesses.

Oil Majors’ Competitive Response Covers the Entire Value Chain

However, EVs present an opportunity to oil majors. Most oil majors have renewable energy subsidiaries, and EVs present a new customer segment; existing service stations are perfectly placed to convert to EV charging points and 30-minute recharge times are an additional opportunity to attract customers into a retail store. But EVs are just one part of a wider energy service ecosystem which oil majors are targeting. Shell’s recent investments and acquisitions include a sizeable portfolio of grid-scale renewables generation; Sense, a smart home technology vendor; EV recharging points in the UK; and an energy supply business with 850,000 customers.

Oil majors, if certain scenarios play out, could suffer significant loss of value in the energy transition. This has helped create significant momentum behind oil majors’ activity in downstream energy, eclipsing any efforts from telcos over the past decade.

Shell and most other oil majors recognize there is significant value up for grabs in downstream energy. Their challenge is how to pull together their different acquisitions into a service that offers significant differentiation from utility industry incumbents. The challenge for these incumbents is a credible competitive response: utilities in competitive markets must first recognize value-at-risk from non-traditional competition, then develop products and services for the 21st century consumer.

 

Major Businesses, Beware Myopia

— December 21, 2017

Develop Peripheral Vision to Manage Industry Disruption

The past 50 years have witnessed the collapse of many corporate giants, often caused by the systemic myopia of business leaders. The likes of Blockbuster, Kodak, and Polaroid demonstrated a failure to recognize where the value lay in the digitization of their industries, for example. As we move into 2018, energy industry disruption is accelerating. Huge opportunities stem from increasing complexity and disruption, but the risks of utilities becoming the next Kodak are also increasing. To combat competitive threats, the industry must develop peripheral vision—the use of competitive early warning signals and scenario planning—to exploit opportunities and manage threats.

Identify and Monitor Early Warning Signals

A competitive early warning system delivers this peripheral vision. By maintaining a broad perspective, utility executives can focus on where changes are happening the fastest and identify where future value lies. However, it is imperative for executives to filter signals from noise and focus attention on the developments that have the highest potential to hurt a business in the coming decade. Scenario planning is a useful filtering tool: a signal such as the development of a new technology, product, or service is extrapolated into the future in several scenarios that gauge the likelihood of adoption and potential impact.

For example, there is a growing trend for residential customers in Europe to purchase solar PV bundled with storage. German battery vendor sonnen has developed a solar plus storage product—sonnenFlat—which requires customers to only pay a flat fee every month. As part of the deal, customers provide sonnen with access to their distributed energy resources (DER) to provide grid services. In return, sonnen guarantees customers free grid-sourced power when their DER is unavailable. sonnenFlat is a new, niche product. Nonetheless, utilities globally should be assessing the risk this poses, particularly when combined with community solar programs. A self-sufficient solar plus storage customer is lost to an incumbent supplier for 20 years.

Measure the Likely Impact on Business for Each Signal

No one can claim to know the future, but with careful planning, a company can prepare for the most likely scenarios. The potential scenarios for residential solar plus storage installations span from little or no growth through near ubiquity. The industry should be asking whether solar plus storage could kill the traditional grid supply model. Careful analysis of the market—for instance, using SWOT or PESTLE approaches—will help gauge the likelihood of different scenarios.

In many countries, the cost of financing solar plus storage is less than a household’s annual electricity bill; falling technology costs and rising power prices will make the solar plus storage option more compelling. While the economic argument is increasingly convincing, there are many reasons why adoption is relatively low, including apathy and ignorance.

Expect (and Plan for) the Unexpected

Customer preference is the biggest driver of solar plus storage, and therefore beyond the industry’s sphere of influence. There is little an incumbent energy provider can do to protect existing revenue from power supply by deterring customers from making solar plus storage investments. This strategy also fails to capture the value of solar plus storage. The industry should be planning strategies to respond to the growth of solar plus storage. These include the development of solar plus storage products, aggregation services, providing the infrastructure on which third parties can offer services, or partnering with or acquiring existing providers. It is possible to be as well-prepared as possible by recognizing the biggest threats and creating risk mitigation strategies in advance.

To mitigate risk, utilities must plan scenarios for a large number of signals in a well-defined early warning system.

 

In an Age of Digital Disruption, Cities and Utilities Must Work Closer

— December 19, 2017

Energy transformation will force the industry to reassess existing value propositions and identify new revenue streams. Until recently, this value lay in single technologies—such as smart meters or solar PV. However, the industry is recognizing value in the convergence of technologies that have historically been treated separately. These technologies might not currently sit within a utilities’ existing area of influence. The potential convergence of EVs, automated driving, smart transportation networks, charging infrastructure, metering, and billing could create huge opportunities for utilities. The industry should keep an eye on disruption in other industries, particularly transportation and smart cities.

Utilities Must Identify Where Value Will Be Created

Kodak is an often cited example of how companies can fail in periods of industry disruption. Kodak developed the first digital camera and owned many patents related to digital photography. Yet, it failed to recognize where the future of digital photography value lay. It believed that digital photos would still be printed on Kodak paper and did not consider a future where users would share digital images online.

There are many lessons that utilities can learn from Kodak, primarily that nothing within business models can be taken for granted. No part of the value chain is immune from the risk of future irrelevance. Every company must consider where the future value will lie in the energy transition. For many, this will focus on helping customers reduce their power consumption, instead of supplying more power. ENGIE UK and the Netherland’s Eneco have both stated their intentions to shift to this service-based approach. The industry has also recognized the growth opportunity in supplying power to EVs and the associated vehicle-to-grid services.

There Is Significantly More Value for Utilities beyond EV Recharging Infrastructure

However, I would posit that utilities have not yet recognized the potential value that lies beyond EV charging infrastructure, supply, and grid services. The automotive industry is undergoing a period of disruption arguably greater than what utilities are experiencing. As city leaders are increasingly concerned about pollution and congestion, cities such as Paris, Athens, Madrid, and Mexico City have announced bans on the most polluting diesel vehicles by 2025. The UK, France, and China have announced bans on the sale of all light duty internal combustion engine vehicles in the next 20 years.

While EVs will play a large part in the shift away from petrol and diesel and offer an opportunity to utilities, there is significant value to be gained by the most ambitious utility. Decarbonization is just one part of automotive disruption, and we are starting to see a shift in trends of car ownership. Increasing numbers of urban residents are turning their backs on car ownership. Singapore has legislated that there will be no net increase in car ownership after 2020. Auto manufacturers are investing millions in automated vehicles, which could hugely disrupt ownership models and, consequently, the taxi and car hire industries.

Utilities Must Work Closer with City Leaders

City leaders—keen to improve air quality and reduce traffic congestion—could be the primary driving force behind a shift to shared ownership and automated models. However, they will need partners to deliver the sophistication of smart transportation services. Utilities have an opportunity to provide the recharging infrastructure for EVs, so it is not inconceivable that they can manage additional infrastructure, such as the metering and billing of automated vehicle use, predictive maintenance of vehicle fleets, fleet asset management services, and more.

Over the past decade, I have witnessed (at least some) utilities’ reluctance to cooperate with smart city programs. However, the concomitant digitization and disruption of electricity and transport create a strong argument for cities and utilities to work closer for their mutual benefit and the benefit of citizens. Navigant Research recently published a list of recommendations for utilities to work closer with city leaders.

 

Where Are All the Meter Manufacturers in Transactive Energy Projects?

— December 7, 2017

That’s a question I’ve been asking myself recently. The answer seems to be “nowhere.” In the 110 or so trials of utility industry-related blockchain and transactive energy (TE) Navigant Research has identified, meter vendors are at best the silent, invisible partners of other companies. When asking leading blockchain and TE startups about the meter hardware in their trials, the stock response has been “nothing is available that supports our requirements, so we built our own.” So, why aren’t meter vendors making more noise about a potentially significant growth opportunity?

Blockchain is the hottest, most hyped technology in the energy industry, and TE is its hottest use case. If current TE trials prove successful, I expect rapid adoption, particularly in countries with high penetration of solar, supported by ratepayer-funded incentive mechanisms. TE’s market-based incentives could replace subsidies. Large-scale, fully automated TE platforms have a number of requirements, as discussed in Navigant Research’s Blockchain for Transactive Energy Platforms report:

  • TE pricing requires visibility into local network conditions, including network assets and distributed energy resources.
  • Smart contracts—which determine when transactions are opened and closed—must be hosted locally and fed with market data.
  • Meters measure and record all TE power supplied and consumed.
  • Communication networks will transport data to interested parties.
  • Transactions must be recorded to the blockchain.
  • Significant distributed compute power will support automation of the TE platform.

Meter Vendors Can Support Many TE Functional Requirements

TE markets will have to be settled in much the same way as wholesale power markets are today, in accordance with strict market regulations and technology standards. This is a complex system, where a lot of trust will be placed on the technology platform. Meter vendors have many capabilities that could put them in a commanding position to lead the TE space:

  • Smart meters already provide visibility at the point of consumption.
  • Advanced metering infrastructure communications could provide the data networks on which TE runs.
  • Smart meter data concentrators could be used as nodes for the blockchain, store smart contracts, provide compute power for localized pricing calculations, and so on.

There is another feature that meter vendors have so far overlooked: it is difficult to amend records already committed to the blockchain. Consequently, it is vital to ensure that transaction data is correct before it is recorded. This will be a difficult task in a largely automated TE platform. While smart meter accuracy is generally high—between 99.5% and 99.9%—a validation algorithm is run regularly to estimate missing or erroneous meter readings. In TE, a similar algorithm must run on transaction data. However, it is likely that validation will be distributed alongside the ledger, rather than a centralized batch process. Most meter vendors also offer a meter data management system with an associated validation algorithm.

Despite meter vendors’ requisite hardware and software, they are nowhere to be seen in the TE world. There are many reasons: ongoing major smart meter rollouts command a lot of attention, and there is little money to be made in TE right now. However, I would have expected at least one vendor to have taken the leap into the world of TE. The biggest risk is that meter vendors are trapped in the old utility world, where metering innovation was driven by utilities—with whom meter vendors have decades-old relationships—and adoption of new metering technologies was slow and incremental.

TE adoption will be different. It is driven by startups that have no previous relationship with meter vendors. These startups could develop their own validation algorithms; they could choose to use public 5G networks for data communications; or they may decide to deploy their own distributed compute. If this happens, meter vendors will miss out on potentially billions of dollars of value created by TE. Meter vendors must wake up to the reality of TE and the opportunities and threats the market presents.

 

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