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Business models in the energy market and their dependency on digital capabilities

The energy market is currently in the middle of a large transition: Moving from the monopolistic market model, with large energy producers covering the whole chain of activities with focus on carbon-based commodities, towards local decentral energy production by the customer itself and based on renewable energy.

Availability of the right data now determines whether energy will be sold or bought, produced or consumed, delivered or stored [1]. Customers often become prosumers and will be more actively involved in the management of flexibility of energy consumption and generation, which leads to a new energy ecosystem. If the traditional energy companies can’t pick up the pace and adapt to these renewed and complex circumstances, newcomers will take over the current market with their ‘disruptive’ initiatives.

A complex situation with new business models in a traditional market

Traditional players are not only struggling with their large asset portfolio, but also with increased competition and decreasing gross margins. In their quest to renew their business model, or to offer new products and services, the historical legacy of the organisation is tampering with their success, and preventing them from transforming these new initiatives into success stories [2]. Almost every month new start-up companies are entering the market and challenge traditional market players by focusing entirely on specific market roles, carrying out extensive marketing campaigns and providing well designed digital platforms to their customers. One of these success stories is the Dutch 'energy sharing' platform Vandebron: it has shown impressive growth during the last two years, with 100.000 customers forecasted by the end of 2016. Full transparency towards the customer,  a trending shared economy platform and sustainable positioning are amongst its main success factors. This strategy fits perfectly within general trends like shared-economy and sustainability.

Digital innovations stimulate these new market initiatives, and data analytics becomes a core competency for marketing departments, for example to support the ‘knowledge of your customers’. Its integration into the core business processes remains a challenge. Zooming in further on data analysis,  we distinguish Market, Customer, Web & Channel analytics. In-depth analysis of these domains should guide marketing activities and increase the success rates of the executed and scheduled campaigns (Figure 1). Concrete examples of activities are ‘personalised’ offerings and a pro-active communication to prevent inefficient contact moments with customers. 

Figure 1: Example of Customer segmentation based on data analytics

Traditional market players react with innovation budgets

As challengers gain more and more market share, their brand awareness is further increasing in the market. This triggers customers, in some cases, to switch to suppliers other than traditional energy suppliers. As a reaction to this success, traditional players are trying to follow the trend and innovate, like Vattenfall/NUON, which recently launched its 'energy sharing'-platform Powerpeers. To be able to speed up innovation initiatives without hampering the existing organisation, traditional players are choosing to invest in smaller start-up companies. In this way, innovation can be stimulated, providing a solution to successfully combine old and new business models.   

Eneco was one of the first energy companies to launch such an investment strategy when it set up its Innovation & Ventures business unit a year ago. Eneco allocated a budget of € 100 million in 2015 to invest in new products and services and to take part in start-up companies. One of the most successful innovations is Eneco’s Toon product, the thermostat which enables customers to smartly manage energy at their homes, and which is already being used by 200.000 households. Eneco has also become 100% owner of Quby, the producer of Toon, and is now able to resell this thermostat via other suppliers or independently from their supplier contract. In the same way, Engie (formerly Electrabel) will position Boxx towards its Belgian clients, a thermostat  produced by Eneco’s daughter company Quby. This strategy fits perfectly in the international ambition of the company, aiming to install one million smart thermostats in Europe by 2017.

Sia Partners sees digital innovations emerge for different purposes: technological research and development initiatives, industrial transformation initiatives, internal digital transformation initiatives and initiatives targeting customers. These initiatives have an impact on the entire value chain of each energy company. This article focuses on external initiatives and the transformation of traditional business models.

Shaping the future business model for utilities

Sia Partners has identified three business models that could be successful in this new energy market environment. These have been classified as the ‘Pure retailer’, ‘Specialised provider’ and the ‘multiple play strategist’ which are portrayed in figure 2.

Pure retailer

The pure retailer focuses on being a low energy cost provider to the mass market. The organisation is defined by its low cost structure and minimalistic design limited to a front office and a sourcing department. The objective is to reduce costs through economies of scale. As a result, with both low costs to serve and reduced margins, the customer can benefit from low-priced products. The foundation of this structure is based on minimising days sales outstanding (DSO), optimising internal processes and maximising customer acquisition through marketing actions and promotions. In-depth analytical skills and fully automated processes are critical to the success of this business model.

Specialised provider

This business model is focused on facilitating the customer in all of its energy related needs. Through dedicated partnerships, the energy retailer will maximise its service orientation and create added value for the consumer. This added value will be translated into a premium on the offered product price to the customer. The differentiating factor for the utilities is capitalising on the right growth opportunities and technological innovations (such as smart meters, storage technologies, etc…). 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 its position and avoid all bypasses when interacting with the customer, by means of the perceived added value. An example of this business model is the investment strategy of Eneco with investments in new products & services via partnerships with start-up companies.

Multiple play strategist

The multiple play strategist also operates in markets other than only the energy market. The focus is on maximising 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 organisation needs to be structured in such a way that supporting departments facilitate more than only one market or customer type. Internal efficiencies must ensure maximised communication and data streams as one customer will appear in multiple systems which can cause both opportunities, in combining invoices, and threats, through miscommunication, in the interactions with the customer. DELTA positioned the multi-utility strategy for years in Zeeland, but these days also Budget Energie and NLE move towards this strategy by providing telecom, television and internet services.


Figure 2: Three future business models for utilities

The traditional local customer base under pressure

One of the main issues for traditional players is the increased churn rates as a result of a heavy competition, not only from challengers, but also from other traditional players benefiting from huge promotional budgets. To stop the dwindling of their traditional client base, big retention campaigns and additional promotional budgets were set in place. Their main goal was to stabilise the number of clients and to keep loyal customers in their portfolio. These retention budgets were significant and the major part will be transferred directly (or indirectly via gifts) to the end customers.  

The question remains if this money is well spent and actually leads to an increased customer satisfaction and loyalty in the end, especially when basic services and sustainable offerings still need to be improved. With this in mind, the struggle of traditional players is very clear: In these tough times of heavy competition and decreasing gross margins, they should invest in innovations with new products and services to catch up with new challengers, and further invest in retaining their existing market base via campaigns and promotions.

Success factors in Digital Transformation

Sia Partners previously investigated the complexities linked to digital transformation, and two main factors were uncovered based on a market scan: the first was the lack of resources allocated to digital transformation, which seems to be obvious in this difficult economic context. The second was the internal resistance to change, that seems difficult to overcome. [3].

To conclude

Traditional energy companies should dare to make radical changes now, or else they remain miles behind their competition. Loyal customers form a stable basis for them,  and should enable them to survive, on the condition they develop the right digital initiatives as part of a clear digital roadmap. Challengers will continue to struggle against existing market rules and legislation, but there is room for them to be profoundly ‘disruptive’ and to make the incumbents’ life very difficult if not obsolete.

The increasing use of digital initiatives is facilitating a successful transition towards new energy business models.  However, the key to success remains the real added-value these new business models will provide to end customers. No fancy portal or customised direct mailing will compensate and cover the lack of value of a renewed business model.



[1] Digital Transformation asks for a New Way of Working, Sia Partners energy blog http://energy.sia-partners.com

[2] The strength to transform, Sia Partners energy blog http://energy.sia-partners.com

[3] Digital initiatives to support the Energy Transition, Sia Partners energy blog http://energy.sia-partners.com

Copyright © 2016 Sia Partners. Any use of this material without specific permission of Sia Partners is strictly prohibited.

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