Power to the People

How digital is disrupting the energy industry - Top 4 trends

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While established utility companies held regional monopolies for the past 150 years, shifts in consumer preferences and emerging technologies like solar generation, battery storage, and electric vehicles are confronting them with tremendous new challenges. If they plan to play an important role in the future, they will have to adapt to the trends that will shape the industry’s playing field. It is estimated that the energy sector alone will pour $590 billion into the digital transformation from 2017 to 2025, according to Bloomberg New Energy Finance.

Trend 1: The smart grid is the foundation of a new data-centric business model

Traditional electricity grids were designed to evenly deliver electricity – regardless if demand is at a peak or low. While this solution was appropriate to avoid overloads in the past, the increasing number of decentralized energy generators require a more versatile approach to match supply and demand – the so called smart grid. It allows two-way communications between the the utility and the network, including customers. And according to a survey conducted by EY, 46% of 50 surveyed companies stated that the digital grid was among their top three strategic programs or has been earmarked for investment in the next 12 months.

The transition from the traditional to the intelligent grid, which is accompanied by the introduction of smart meters, will supply the masses of data that will serve as foundation of a new data-centric business model. Utility companies will gain in-depth insights into all stages of their business – from generation to distribution to usage in households. As of 2016, around 70 million smart devices were already installed in the U.S..

With this massive data treasure at their feet, advanced data analytics and AI will enhance the prediction of supply and demand, reduce energy waste, and make dynamic tariffing a possibility. Intelligent tools further allow for predictive maintenance, preventing costly outages before they actually occur, while self-repairing networks reroute power around defect spots on the grid. That results in more reliable, more efficient, and ultimately less costly operations. According to global consulting firm Capgemini, by digitizing operations, production cost can be reduced by up to 27% over the next 5 years while CO2 emissions can be decreased by up to 625 million metric tons until 2025.

At the customer’s site, smart meters provide detailed information about a customer’s actual generation and usage of energy. This enables providers to deliver tailored product offerings at times where they are needed the most. Higher customer satisfaction and retention as well as higher revenues are among the key benefits of this personalized approach.

Trend 2: Electricity gets decentralized

As technologies like solar rooftops and battery storage are becoming more affordable, more and more households are making the shift from the grid to locally generated energy. That is a process that will likely accelerate in the coming years, caused by ongoing technological progress and the pursuit of climate goals by entities like the European Commision, who aim to massively increase the share of renewable energy sources as part of the overall generation of energy.

The increasing decentralization of the generation of energy poses a challenge for established utilities. Their networks are facing decreasing profits since the shift to local energy generation is economically attractive, especially for heavy users who previously contributed a lot to the network’s earnings. Simultaneously, they have to make additional investments into their network infrastructure to handle the high volatility that comes with the distributed generation of renewable energies. In combination, that leads to eroding profit margins.

But with this transformation in technology and consumer demands, also new opportunities for future growth open up. Established players have the possibility to offer decentralized service solutions, like platforms for distributed energy resources and customers, with an intense focus on customer experience. According to the Boston Consulting Group, this will lead to an EBIT share of service-related businesses increase from 9% (2015) to 14% by 2025.

To fully profit from the shift to decentralized energy generation, utility companies should consider either acquiring innovative service companies or building their own.

Image source: shutterstock.com

Trend 3: Invest in a holistic digital customer experience

Born-digital companies like Facebook, Amazon, or Zalando are having a lasting impact on consumer expectations. Their “customer first”-approach has raised the bar. Customers are increasingly expecting the same qualities from old-fashioned companies in the utilities sector.

A lot of utility companies are already launching mobile applications through which their customers can manage their plans, make payments, and receive notifications about outages and other news. We will see these applications become more powerful in coming years with the introduction of services to digitally manage the energy plans of smart homes or electric vehicles.

However, as of today, average app store ratings suggest that there still is a lot of potential for future improvements regarding customer experience.

In an age where users are increasingly spending their time in front of multiple screens throughout the day, it is important for utility companies to offer a consistent, user-friendly journey for their customers. To establish an omni-channel experience, it would be useful to have a look at the above mentioned born-digital companies and their digital offerings. Future mobile applications could become much more powerful, allowing customers to book appointments with technicians and to use data to reduce the consumption of water, electricity, and gas. Mobile applications can even help to manage energy consumption of consumers’ devices (e.g. smart home devices, electric vehicles) from remote locations.

By investing in a better digital customer experience, utility players will be able to strengthen their competitive position in a market that sees a growing influx of non-traditional competitors. Thus they can improve customer satisfaction, see a boost in customer retention, and benefit from an increase in revenues.

Trend 4: Make electric mobility a reality

With governments across the world planning to ban fossil fuel-powered vehicles during the next decades, the development of alternative engines is on the rise. Former Volkswagen CEO Matthias Müller set the ambitious goal of making the company the global number one in electric mobility by 2025. He invested more than 34 billion euros to achieve that goal. Similarly, Daimler plans to electrify its whole car fleet by 2022. And Volvo and Jaguar Land Rover are aiming to do the same by 2019 and 2020, respectively.

At the same time, the demand for vehicles with electric engines is growing. According to the Global EV Outlook 2017, in 2017 more than 750,000 electric cars were registered globally, up from 547,000 in 2016 and 323,000 in 2015. While still being a small fraction of overall car sales, electric car sales are undoubtedly growing fast.

However, while most people agree that electric is the future of mobility, the chicken-or-the-egg dilemma is slowing down the transition. On the one hand, without a comprehensive charging infrastructure, consumers are hesitating to buy electric-powered cars. On the other hand, without a critical mass of electrical cars in use, investments in charging infrastructures are lagging. Most utility companies are in a rather passive “wait and watch” mode right now.

Companies like ABB (the global market leader in charging stations), Enel (who recently acquired the charging station developer Electric Motor Werks), and Tesla are already building out their positions in a market that could be worth up to $45.59 billion by 2025. Other utility companies will have to adapt to this emerging market if they don’t want to lose out on future growth.

Image source: shutterstock.com

Summary: What to do

After 150 years of highly predictable demand, a monopoly-like market position, and huge profits, utility companies need to adapt to new competitors and trends altering the industry’s playing field. The digital revolution shouldn’t be perceived as a threat, but rather as a chance to conquer new frontiers, capturing big shares of growing markets. Changes in customer expectations force traditional players to digitize their customer journey. Government regulations are pressuring them to develop efficient solutions for an electric and renewable future.

If businesses want to master these challenges and ultimately thrive in this new evolving ecosystem, they will have to implement cutting-edge technologies like AI and advanced analytics into their operations and shift their formerly product-centric business models to ones that put the customer in the center. Thus, utility players cannot rely on only reducing their costs by making their value chain more efficient. Instead, they must unlock new revenue sources by re-imagining themselves in a digital world in order to maximize customer satisfaction.

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