Navigant Research Blog

Europe’s Energy Transition Megatrends and Tipping Points, Part VII: The Power of Customer Choice and Changing Demands

— September 9, 2016

Energy CloudJan Vrins coauthored this blog.

In our initial blog on Europe’s energy transition, we discussed seven megatrends that are fundamentally changing how we produce and use power. Customer choice and rapidly changing customer demands are one of the megatrends driving Europe’s energy transition. In this blog we discuss how utilities and new entrants are competing for customers and market share through new energy products and services, as well as how they are implementing new business and revenue models in search of growth and shareholder value. We also discuss a path forward, which we call the Energy Cloud Playbook.

What’s Happening?

Whether residential, commercial, or industrial, more customers want to control their electricity usage and spend, as well as when and what type of power they buy. Historically, customer choice was restricted to switching suppliers. However, the European market is rapidly changing, and utilities will have to prepare themselves for far more complex customer demands and relationships. For example, many customers now want the ability to self-generate and sell that power back to the grid. Many European homeowners have installed rooftop solar and are interested in storage. Additionally, despite the reduction of subsidies in some countries, overall distributed energy resources (DER) will continue to grow in the long term. On the commercial and industrial side, large corporations like IKEA, BMW, Metro AG, Unilever, Swiss Re, Roche, Aviva, and others are increasing their focus on sustainable energy solutions. The key question moving forward is who will capture the value of more local (distributed), broader, energy management and individualized energy—the incumbents or the disruptors?

Increasing Competition

The European power markets are struggling to balance the requirements to reduce prices, invest in renewable generation, secure supply, and improve the customer experience. European electricity customers pay some of the highest prices in the world, yet many customers receive substandard service from their current utility provider. The move toward a single European energy market is the cornerstone of EU energy policy; thus, there is an expectation that power markets will become more competitive, not less. Competition has many consequences for a utility’s customer relationships, which can directly affect the utility’s business model. However, it is not the only factor: consumers are becoming increasingly aware of the financial and environmental cost of their power consumption. They are also increasingly expecting better, more personalised service from suppliers. As a result, customers will engage with the power industry in new ways, demand new services, and seek out alternative suppliers and options (like self-generation, energy management, etc.).

A New Deal for a New Breed of Customer

The European Union wants to put consumers at the heart of the power market. In the second half of 2016, a set of legislative proposals for a new energy market design will be published. This new deal for energy consumers is based around three pillars: saving money through better information, a wider choice of actions when participating in the power market, and maintaining the highest level of consumer protection. The market design will enable customers to actively participate in the market, adapt their consumption according to the requirements, create clearer bills, and accurately compare prices to improve switching rates. The European Union also reiterated its desire to tackle the issue of residential price regulation that hampers competition. Finally, the market design will try to remove barriers stopping customers from generating their own power and selling excess generation back to the grid.

Commercial and industrial (C&I) customers are central to Europe’s transition to a low-carbon economy. Many corporations have incorporated sustainable energy consumption within their corporate responsibility agendas. For example, Swedish furniture retailer IKEA plans to completely shift to renewable energy by 2020 and will invest up to €1.5 billion (~$1.7 billion) in wind and solar energy as part of its new safeguard nature strategy. The company does not rule out becoming a net energy exporter, potentially selling the surplus of energy to suppliers or customers.

Most customers—both residential and commercial—who generate their own power will do so with solar PV (potentially combined with storage). Until a few years ago Europe dominated the market for solar PV installations, driven largely by a range of different subsidies. These subsidies have largely been removed, and the market has flattened. However, we could be witnessing a short-lived consolidation period for solar: the market could soon pick up as the cost continues to decrease and if current import tariffs on cheap Chinese panels are lifted.

Other DER will further transform the way customers consume power. Locally available battery storage will help customers become more self-sufficient; EVs will dramatically change how, when, and where customers use energy; and peer-to-peer trading networks will help customers decide to whom they will buy or sell their power.

A New Business Model for the New Deal

These new customer demands are already reshaping the utility market. The more forward-thinking utilities are making significant investments into new business models, and competition is increasing. Time is running out for the less adventurous: smart metering will be a reality in the majority of European countries by 2020. Those companies that have prepared for a more connected, digital, and personalised customer relationship will be at an advantage against those that have not.

One of the most significant business model changes is the shift from a commodity-based supply business to an energy service provider. Many utilities have expanded their product offerings beyond the regulated power supply model and broken into new areas—smart home technologies, boiler maintenance or replacement, insurance, home appliances, and security systems are just some of the services offered. One other important area is the relatively new phenomenon of broadband and other communications services. Dutch utility Delta sells broadband, fixed-line, and pay TV services alongside power and gas.

The market is not immune to new entrants. Some telecommunications companies such as Croatia Telecom are now bundling energy with their more traditional services. Other telecoms, such as Deutsche Telekom and O2, are heavily investing in smart home technologies. New models of buying power—including collective switching groups and energy cooperatives—are appearing. In the United Kingdom where the model of municipal-owned utilities was scrapped years ago, councils are setting up their own energy businesses to offer low-cost power to their citizens.

Battle for the Grid’s Last Mile


(Source: Navigant Research)

Competition will not end there, as many companies will likely enter the market with radically new business models. For instance, as solar PV and battery storage technologies become cheaper and more efficient, many customers could be taken completely off-grid by new entrants. Retailers, technology companies, and telecoms are also looking at smart home technologies that could ultimately cut utilities out of many customer relationships.

New Business Models Need Better Customer Understanding

As new technologies—smart meters, EVs, distributed generation, energy storage, and smart home devices—proliferate and mature, so will the opportunity to develop deeper and more complex relationships with customers. However, as these opportunities grow so does the threat from competition. To create the right products and services and market them in the most effective way, utilities must better understand their customers’ needs. New technologies will bring deep insights into each customer’s requirements. By using advanced analytics, utilities have a unique opportunity to put the voice of the customer at the heart of their business planning.

What Does All This Mean for Utilities?

Utilities have to adapt. Customers will look for better, greener, and cheaper alternatives, and more and more of these alternatives are becoming available. What’s more, the fight for large C&I customers is going to change dramatically. If only a small percentage of large C&I customers switch over to local distributed generation and energy management solutions, current suppliers and network operators will be in trouble. This will affect their revenue streams, roles, and the cost versus value of the centralised managed grid.

Facing declining revenue as customers consume less and produce more of their own power, utilities are confronted with potential stranded generation (and eventually transmission and distribution) assets. This makes it even harder to make large investments aimed at improving reliability and resilience in their current grid while also making it more intelligent. Utilities also have to make investments in developing DER capabilities, offerings, and businesses.

Given these challenges, utilities must play both defence and offense. An updated defensive strategy requires suppliers to engage with customers to understand their changing demands regarding price, sustainability, and reliability. They also have to continue to improve customer service at the lowest prices possible. Network operators must engage with regulators to find equitable ways to charge net metering customers for transmission and distribution services that fairly address the cost to serve. They have to continue to improve grid reliability at the lowest cost possible and streamline asset management and operations, while also developing utility-owned renewable assets to appeal to environmentally conscious customers.

Playing offense is even more important. Suppliers must create new revenue streams through the development of new business models, products, and services. They also have to transform their organisations and culture in order to fully integrate sales, customer service, and operations. Network operators must upgrade the grid and operations to facilitate the integration of DER and explore new revenue streams as a network orchestrator.

There is no going back to the old ways of doing business. Utilities must lead—by playing both defence and offense—or they run the risk of being sidelined.

Utilities conducting strategic planning must embrace an agile mindset focused on achieving two objectives: accelerating the time to market readiness and reliably producing high quality results. This will be crucial to remaining competitive, as value moves down the value chain and barriers to entry are decreased/eliminated. The opportunity lies in continuously shaping DER portfolios, embracing the rise of the digital prosumer, and capitalising aggressively on platform opportunities for unbundled solutions. We believe that utilities must begin transforming their operations and business models today by simultaneously pursuing risk mitigation capabilities and making bold bets on potentially high-growth product offerings. In our newest white paper, we describe how businesses develop and implement a strategic identity and growth plan (10-15 years), as well as an agile Energy Cloud Playbook (6-12 months) that will help them navigate the path forward and take control of their future.

This is the seventh in a series of posts in which we discuss each of the power industry megatrends and impacts (“so what?”) in more detail. Our next blog will cover the emerging Energy Cloud. Stay tuned.

Learn more about our clients, projects, solution offerings, and team in our Navigant Energy Practice Overview.


Integrated DER Maturity Assessment, Part II of III

— July 18, 2016

Energy CloudAs introduced in the first post in this series, Navigant has created the Integrated Distributed Energy Resources (iDER) Maturity Model for electric utilities in an effort to help utilities understand and appropriately adopt DER. DER adoption is one of the most disruptive factors affecting the grid today and into the future. Many North American utilities are unprepared for the dynamic impact these resources will have on current grid operations. For utilities to take control of their future, an iDER strategy and approach is critical. The iDER Maturity Model provides the benchmark for a utility to measure their current state, a guideline for what a mature utility looks like, and a starting point for what the next steps should be.

Navigant’s multifaceted iDER Maturity Model benchmarks a utility against five maturity levels across the following major dimensions:

  • Leadership
  • Regulation and Policy
  • Business Models
  • Customer
  • Operations
  • Technology

For each category, Navigant also defined a one to five “maturity level” scale, as shown in the table below, ranging from Level 1: Inactive DER, to Level 5: Fully Mature iDER Business. By ranking a utility’s maturity across each dimension, Navigant has created a matrix that utilities can leverage to understand and map out a profitable path to the future. To illustrate the maturity levels, two utility profiles describe how organizational initiatives can be benchmarked against our iDER Maturity Model and how the matrix can be used to identify next steps.

iDER Maturity Level Descriptions

iDER Descriptions

(Source: Navigant) 

iDER Maturity Model Benchmarking Categories

iDER Benchmarking

(Source: Navigant)

Example Utility A: Business as Usual Market (Maturity Level 1 to 2)

A utility in a state representative of business as usual (BAU) stayed the course on investing in traditional generation assets and was reluctant to even pursue advanced metering infrastructure (AMI) investments. However, disappointing load growth and increased federal regulations targeting fossil generation of late are undermining long-standing assumptions, causing management to reevaluate priorities. This includes surveying DER opportunities and contemplating shifting investments toward assets and services that would support DER. The question remains of whether these efforts will be too little too late as the utility’s customers increasingly become targets for third-party providers of energy services.

This utility is behind the curve and should use the iDER Maturity Model to identify the starting points for piloting DER initiatives. In addition to planning investments in AMI, the utility needs to begin redesigning and overbuilding targeted portions of its distribution grid, as well as installing control and safety schemes to allow for the two-way power flows seen with high DER penetration. For customers, the utility also needs to begin development of a streamlined process for integrating rooftop solar and electric vehicle (EV) charging stations, and to pilot mutually beneficial customer DER programs. On the operations side, the utility leadership needs to develop IT/OT tools and processes for its operators to manage DER and to help bring DER from the fringe into the mainstream within its organization.

Example Utility B: Grid Reform Market (Maturity Level 3 to 4)

A utility that operates in what could be characterized as a grid reform state (i.e., under aggressive renewable and distributed policies) has taken a decidedly Energy Cloud mindset. Anticipating a more networked grid, this utility has begun developing new services—integrating EV charging with demand response (DR), offering bring your own device programs to customers, etc.—to serve an integrated, plug-and-play electricity system that it believes will enhance the value of individual assets across the network. With the goal of shifting away from the traditional ratepayer model, this utility is taking steps to provide customers maximum flexibility and choice in how they use energy in order to maximize value across the network. To accomplish this, this utility is proactively building collaborative partnerships with technology providers.

This utility has a leg up on many utilities, but can still leverage the iDER Maturity Model to clarify its vision of the future and identify next steps. The utility should focus on expanding the membership to its DER programs through improved customer outreach, possibly implementing a new customer portal, and offering new DER programs in transactive energy, rapid DR response, and targeted residential programs.  On the operations and technology sides, it will be very important to integrate all DER management systems with other IT/OT systems, such as customer information systems (CIS), advanced distribution management systems (ADMS), and meter data management systems (MDMS), to remove organizational and operations silos. As DER penetration grows, operators need to see DER as just one more lever they can pull in managing the grid, just like dispatching additional generation. Finally, as IT/OT systems become more interconnected and complex, the communications network limitations can often become a hindrance—the utility should utilize grid edge intelligence as possible and ensure network security and latency issues are resolved.


Integrated DER Maturity Assessment, Part I of III

— July 11, 2016

AnalyticsWhy Prepare for Distributed Energy Resources?

Navigant’s forecasts show that distributed energy resources (DER) capacity is expected to grow almost 3 times faster than new central station generation over the next 5 years. Total DER capacity is expected to more than double by 2023. Meanwhile, North American utilities are at various stages of integrating distributed generation, demand response, energy efficiency, electric vehicles, microgrids, and energy storage. Many are unprepared for the dynamic impact these resources will have on current grid operations and their overall operations.

For utilities to take control of their future, an integrated DER (iDER) strategy and approach is critical to manage their transition to the Energy Cloud, a platform of highly networked distributed energy, two-way power flows, and intelligent grid architecture. To help our clients navigate this changing landscape, Navigant has developed the Energy Cloud Playbook. The first part of the playbook is the iDER Maturity Model, which helps utilities assess their own iDER preparedness.

Navigant’s iDER Maturity Model

Navigant’s multifaceted iDER Maturity Model allows utilities to assess their progress toward DER integration. In this first in our series of posts on the Maturity Model, we provide a blueprint for what a fully integrated DER system looks like. The blueprint presented here would score the highest ranking of 5 in our Maturity Model, and then we define five levels of iDER maturity based on that blueprint. Future posts will establish the criteria for evaluating the remaining four maturity levels in more detail.

What Does a Fully Integrated DER System Look Like?

Utilities at advanced iDER maturity levels will have addressed issues arising from high DER penetration such as intermittency, reverse energy flows, and power quality issues. They are using information and operations technology (IT/OT) in coordination and have aligned their business processes, operations, and organization appropriately. DER management systems (DERMSs) and advanced distribution management systems (ADMSs) are managing DER output at the feeder and substation level. At this advanced DER maturity level, utilities have augmented their role as a supplier of electricity and have assumed the role of a platform provider enabling prosumers to market their DER assets in an open market. This role is not only critical to fully maximize the benefits of DER, but will be key to providing future value to the utilities’ customers and shareholders.

The graphic below summarizes Navigant’s blueprint for a fully integrated DER system. It shows utilities, customers, third parties, market operators, and regulators working in conjunction with iDER processes for full integration across operations, energy markets, and IRP. These processes are supported by critical information, operations, and communications technology (IOCT) systems to ensure active, real-time, and large-scale iDER management. In such a system, evolving energy economics and increasing customer choice, supported by strong policies and mandates, drive DER penetration. Third-party aggregators and customers are incentivized to participate in the local energy markers, supported by transactive energy platforms and systems.

Blueprint of a Fully Integrated DER System

iDER Figure 1

(Source: Navigant)

iDER Maturity Levels

This blueprint for an advanced and fully functioning iDER system would score a 5 in Navigant’s iDER Maturity Model. Working backwards from there, Navigant has a multifaceted criteria model that benchmarks a utility at one of the five maturity levels, as laid out in the table below. What are the criteria for defining these levels of iDER maturity? What are some examples of utilities at each of these maturity levels? We will answer these questions in the next post in this blog series.

Proposed iDER Maturity Levels

iDER Table 1

(Source: Navigant)


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