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New business models for energy retailers

Innovations, new technologies, new entrants: As wireless changed the telecommunications industry, distributed generation and information technologies are poised to bring major disruptions to the utilities sector. Overcapacity and tariff pressures are putting conventional power generation under pressure, challenging the sector's major players and questioning the viability of their current business models. These difficult market conditions explain the current transformation process of the energy market, towards a low-carbon and decentralized electricity generation. Energy retailers need to reinvent themselves, and start the transition towards new downstream business models, shifting from energy supplier to an information-driven energy service provider.

Energy retailers at the heart of a service environment

Figure 1 shows the current transition of the energy market. With the closing down of multiple power plants, the industry is slowly transforming from a capital intensive industry towards a more information driven service industry. In this environment, the energy retailer acts more as an enabler for the consumer and less so as a sole commodity provider. As an enabler, the energy retailer is focused on solving the needs of its consumers, which can be in the form of services or products. It is important to note the changing roles within the industry. For example, the consumers are shifting towards power producers, while at the same time aggregators and Energy Service Companies (ESCo's) are forming around demand side management to capitalize on providing balance flexibility mechanisms or other energy contract management services.

Figure 1

Source : Sia Partners

Shaping the future utility business model

Sia Partners has identified three main business models that will lead to success in this new energy market environment. These have been classified as the 'Pure retailer', 'Specialized provider' and the 'multiple play strategist' that are portrayed in figure 2. Specialization is key to maximize the return on the business model.

Pure retailer

The pure retailer focuses on being a low energy cost provider to the mass market. The organization is defined by its low cost structure and minimalistic design limited to the bare minimum such as a front office, back office, pricing/marketing and sourcing department. The foundation of this structure is based on minimizing days sales outstanding, optimizing internal processes and maximizing customer acquisition through marketing actions and promotions. The objective is to reduce costs and cash through economies of scale, to offer low-priced products to the customer. These costs reductions can be further achieved through interactions with other market players. For example, an aggregator can combine multiple power demands, e.g. consumer collectives, and requests a cost effective proposal for which the pure retailer will be best positioned. Furthermore, it must be noted that the pure retailer business model can be extended to the multiple play strategist model by applying its efficient and cost effective organization into other markets.

Specialized provider

This business model is focused on facilitating the customer in all of its energy related needs. Through dedicated partnerships, the energy retailer will maximize its service orientation and create added value for the end consumer. This added value will be translated into a premium on the offered product price to the customer. The differentiating factor for utilities is capitalizing on the right growth opportunities and technological innovations (such as smart meters, storage technologies, etc...). The specialized provider has an optimal interaction with other players in the energy environment as the added-value is dependent on the quality of the partnerships. The challenge of this business model lies in the natural tension that exists within the established partnerships, in which the retailer must justify and secure his position and avoid all bypasses when interacting with the customer, by means of the perceived added value.

Multiple play strategist

The multiple play strategist operates in more markets next to the energy market. The focus is on maximizing the utility of the customers by diversifying the products offered to the same customer. A strong customer relation is key as one customer can be the source of multiple income streams. The organization needs to be structured in such a way that supporting departments facilitate more than only one market or customer type. Internal efficiencies must ensure maximized communication and data streams as one customer will appear multiple times in systems which can cause both opportunities, in combining invoices, and threats, through miscommunication, in the interactions with the customer.

"By focusing on one business model, the added value to the end consumer will become crystal clear"

Figure 2

Source : Sia Partners

Making a successful transition

With the energy market at a turning point it is time for the energy retailer to work out its purpose. End-users are playing a more active role in managing their power supplies, and interactions between market players are intensifying. As a result, data flows are increasing, and energy retailers are losing track of their true added value. Making proper use of the available information streams that are generated in the energy environment is the biggest challenge. These information streams contain the necessary input to fully grasp the market requirements to determine which business model will be successful. By focusing on one business model, the added value to the end consumer will become crystal clear. In order to make use of the desired business model, an effective organization needs to be designed. This requires a change in the organizational structure, facilitating the concentration of internal competencies by grouping specific and complementary skills. The next step is to create functional departments with service levels to multiple customer-related departments as end users. The sooner energy retailers understand the new dynamics at stake and act on them, the better they will be able to take full advantage and evolve accordingly. Failure to do so in a timely manner could render them obsolete.

Sia Partners

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