Technological change in the energy sector is fast changing the landscape. David Morgan, Corporate Finance Partner, Deloitte and NZ Energy Sector Leader.
YOU DON’T HAVE to look far to see how technology is re-shaping the energy sector. Flick Electric Co, 2016 innovation category winner of Deloitte’s Energy Excellence Awards, is fundamentally changing the traditional electricity retail model by giving customers access to market price signals and smart technology to help them reduce their energy bills.
Flick is just one of a number of new businesses that are focused on developing products and services that place customers at the heart of new business models. Our view is that the speed of change will only increase, and the real challenge will be how to identify innovations that will move the dial on the customer proposition.
In June 2016, the theme of Deloitte US’ annual energy conference was “exponential technologies, driving exponential change” and the discussion focused on how to turn disruption in the energy sector from a perceived threat to a palpable opportunity.
Lynn Good, chair, president and CEO of Duke Energy (with a market capitalisation equivalent to the entire NZX 50), emphasised that the customer now serves as an essential guidepost for navigating the rapidly shifting utility landscape.
Customer expectations are where the story begins. If businesses can deliver sustainable value to customers, they will deliver sustainable value to shareholders. This sentiment resonates across what we see in the sector here as utilities begin to realign strategy from a traditional focus on assets to being customer centric, for transmission through to those providing services to households.
Businesses, regulators and advisors are all grappling with the challenge of responding to the rising tide of disruption.
The Australian lesson
Deloitte Australia has explored ways in which energy incumbents can turn the tables on industry disruption. Its recent report argues that unprecedented disruptive changes in the industry are brought about by the convergence of:
- Market conditions favouring the adoption of greater levels of renewable energy and decentralised energy sources.
- Shifting customer expectations of greater participation and choice.
- Tactics of established and emerging players to displace incumbents by transforming the value proposition of energy offerings and applying two-way network effects.
It takes the next step and considers what incumbent executives could do to start preparing their businesses for disruption.
If we look outside the sector at disruptors who are winning in their marketplace, Uber is a great example. Its straightforward mission is “transportation as reliable as running water, everywhere for everyone”. Its customer value proposition is clear – “whether it’s a ride, a sandwich, or a package, we use technology to give people what they want, when they want it”.
And its play is a platform – a matching service, where riders find drivers, and vice versa. Increased participation on both sides leads to reduced waiting times for riders and reduced downtime for drivers. Less downtime means that a driver can make the same amount of money even if fares are lower.
The year ahead
So what does disruption mean for the NZ energy industry next year and beyond? How should businesses in the sector respond, and create an opportunity from all the change?
Deloitte thought leadership from across the globe suggests how far along the maturity curve many of the NZ energy businesses are.
Meridian’s Powershop changed the value proposition by delivering unbundled energy services differently. Powershop offers an “online supermarket” that it says allows customers to buy a suite of products – the amount of renewable energy and their choice of source. It does not lock customers into contracts and households can take advantage of one-off specials for future use. It seeks to make the purchase of electricity similar to the way we might buy petrol, or other consumer products.
In contrast, Trustpower simplifies the buying process by bundling and billing for electricity, gas, broadband, and phone services. Integrated billing and bundling of these services is likely part of Trustpower’s recognition of the essential offerings and capabilities that will allow them to retain a core customer base to fund a period of reinvention.
Vector has partnered with Tesla Energy, a global disruptor in energy and automobiles, to bring the Powerwall battery to New Zealand. Vector states that “as the largest and most cost-effective battery provider in the world, Tesla Energy is the ideal partner and will help us revolutionise the way customers consume energy”.
Complementing this, Vector has also partnered with Power Ledger, a blockchain-based peer-to-peer platform provider. Power Ledger’s platform allows consumers to trade surplus energy from solar panels and batteries directly with each other, without relying on retailers.
Globally, LO3 and ConsenSys have developed a similar platform that uses the Ethereum blockchain to enable the peer-to-peer trade of locally-generated renewable energy at a community level. Their first micro-grid installation was successfully launched in Brooklyn, New York in 2016.
Vector’s partnerships with Tesla and Power Ledger are examples of how incumbents are seizing opportunities created by others to their own advantage. Central to success remains the challenge of selecting and scaling the coherent set of technologies that will position incumbents as leaders rather than fast followers.
While our natural inclination might be to assume that the current 29 electricity retailers won’t survive, a central characteristic of disruptions is that they manifest differently, across different industries.
Our challenge is not to predict how disruptions will unfold, but to think like the disruptor. The success of digital disruptors like Uber hinged upon a customer obsession, a win-win mind-set and the drive to unparalleled value through technology.
With this lens in mind, the question is not whether or not we will be disrupted, or even how. The question is how do incumbents anticipate disruptions and adapt?
What if the 29 became 60, facilitated through the development of an app that could be rolled out with peer-to-peer sales in a week with limited capital investment? Winning customers would be about competitive pricing (which could be facilitated with no material corporate overheads) and having a streamlined customer proposition.
Energy incumbents globally are being displaced by established non-utility players like Google with scalable distribution channels, transferrable capabilities and a customer-trusted brand. Meanwhile tech savvy start-ups also threaten to shrink the current market by creating new platform-enabled markets and replacing some of the traditional channels that utilities have to sell their products and services. While this has not yet happened here, there certainly is a risk of it on the near horizon.
While the combined threat of established non-utility entrants and tech savvy start-ups may not seem like a disruptive concern today, the right combination of market conditions and external catalysts may bring about the ‘perfect storm’ for disruptive threats.
Energy incumbents face the challenge of remaining viable in today’s shrinking market while repositioning for relevance in tomorrow’s emerging market. This will involve navigating a path from the current, asset-centric, rate-of-return regulatory regime to a customer-empowered, need-focused business.