- Energy Business Models
- Utility Digitization
Google, Facebook, and the Independent Energy Suppliers
The de-bundling of most European energy markets happened in the 90s and 2000s but real competition has only accelerated substantially in the last 5 years. For example, the UK had 20 active domestic energy suppliers at the end 2013, growing to 73 suppliers to June 2018. Since then, there have been a significant number of supplier bankruptcies as suppliers failed to compete successfully. To complicate the future of energy suppliers, price comparison websites offering to switch customers to other suppliers (known as switching companies) are becoming a threat to suppliers as they take over customer relationships.
The European de-bundling process broke the vertically integrated model by splitting transmission and distribution (T&D) from generation and supply. T&D remains a regulated monopoly, but generation and supply are open to competition. The introduction of renewables in Europe over the last decade added a significant number of players on the generation side of the industry, while policies aimed at helping consumers to switch suppliers brought new players to supply.
Pure energy suppliers can only compete in price and quality of service to attract and retain services, leaving little margin for error in the execution of the companies’ strategies. Having slightly higher operational costs or a customer management crisis usually ends up with underfunded suppliers going bankrupt.
Auto-Switching Becomes a Major Threat
To complicate this further, a new breed of competitors is appearing in the market—auto-switching companies like Labrador, Flipper, or LAMB. Switching companies started as price comparison sites that were paid by energy retailers to introduce new customers. However, the switching process was rarely smooth, limiting the number of times a customer could switch and, consequently, the incentives a switching company could earn. Recent improvements in the switching process create an opportunity for companies to switch customers as soon as they detect a better offer in the market, potentially every month.
This creates three issues to energy suppliers. First, it increases customer acquisition costs, as they pay switching companies every time a customer moves to them. Second, price competition increases as the cheapest tariffs are offered all the time to stop customer churn. Finally, they are disaggregated (see aggregation theory), as losing the customer relationship to switching services completely commodifies energy supply and reduces the supplier's ability to compete on quality of service. The digitization of energy and the continuous fall in wholesale prices caused by the low marginal costs of renewables will only accelerate this trend.
Google, Facebook, and DER Strategies for Energy Suppliers
In its aggregation theory, Stratechery distinguished between the strategies of Google and Facebook:
“Google modularized content providers. It’s easy to see why this is the case: content has always been monetized by proxy, whether it be paying for newspapers (or advertising space in those newspapers), paying for CDs, or paying for cable TV. The shift to digital has exposed these proxies for the rent-collection mechanisms they are. Facebook, though, has built in some respects an even stronger position: its suppliers are its users, so while it, like Google, aggregates content that it gets for free, it also has exclusive access to that content.”
To survive, energy suppliers could follow the Facebook game-play to fight off the auto-switchers use of the Google strategy. In the energy world, this means pushing for DER technology deployments at the customer edge, completely disaggregating customers from the old energy supply chain (including auto-switchers). Keeping the rights to manage those assets generates even more revenue by trading with them in the energy markets. In this way, the supplier’s main supplier is also their customer, keeping exclusive access to the assets.