How new business models are crucial to boosting energy businesses
Ahead of The Business Booster, the leading innovation event in sustainable energy, Elena Bou, InnoEnergy Innovation Director, explains how, when it comes to the next wave of energy innovation, the brightest minds are looking to new business models to help them reap the richest rewards.
In its 2015 whitepaper, Designing the New Utility Business Models, IDC Energy Insights found that new business models topped the list of priorities for European utilities executives – beating such omnipresent concerns as reducing costs or unlocking operational efficiencies.
This might surprise some. The amount of attention given to new technology in recent years could lead one to think that technological development would have found its way to the top of executives’ minds. But it’s the army of pioneering new business models that will make the biggest difference to the bottom line. After all, these are the innovations that relate most directly to challenges around changing energy usage and that take new technology from development to progress.
What makes a business model new? In short, it’s a new way of thinking about what a business does, how it does it, and how revenues are created.
Typically, innovation has three main drivers. The first is when it is embedded in a firm’s DNA – although this is rather rare in the relatively conservative energy industry. After all, existing models have enabled energy businesses to build huge infrastructure projects while continuing to produce a profit. As they say, “if it ain’t broke, don’t fix it.”
Second, some companies innovate to grow. Francesco Starace, CEO of multinational utilities brand Enel thinks his firm is a prime example of this approach. The utility works with a number of start-ups to bring innovation, without feeling that these new entrants pose a particular risk to its core business. The company proactively looks for opportunities to cooperate with the aim of bringing new value to customers, value which can drive its next wave of growth.
But by far the most common reason for innovation is crisis. Firms can be forced to change to keep pace with market shifts. Outside of energy, Nintendo is a classic example. The iconic videogame firm began life in the nineteenth century as a manufacturer of playing cards but when the public lost interest and sales began to slump, it wasted no time in seeking out a new market – ensuring its survival and making billions in the process.
Perhaps paradoxically, technology has in many ways increased the operational pressure on traditional energy businesses, turning previously safe assumptions on their head.
Disruptive technologies such as distributed generation, low-cost energy storage at scale, electric vehicles (EVs) and smart metering devices are changing how we think about energy. No longer is it a matter of producing as much as possible to stay ahead of demand, it’s now important to consider how and when we use energy to make the most of peaks in generation and fill in the gaps when supplies are low.
This has led to two crucial changes in the structure of the sector. For one, the future of the energy industry is one where intelligent buildings connect to EVs and small-scale generation links to the grid.
Up until now, people have been passive consumers of energy, flipping a switch to turn the lights on without a second thought. But with the shift towards demand response, consumers will start to take a more active role, not just consuming energy, but managing and even producing it too.
Such wholesale change means energy firms can’t afford to rest on their laurels. They need to remain at the forefront of new technologies, connecting the grid and keeping consumers contented in the process. Because if they don’t, someone else will. That’s why two-thirds of European utility executives surveyed in 2015 cited non-utility companies as the most serious threats to their business models.
Of course, there’s no ‘one size fits all’ model of the future. Instead, we’ll see what I like to call the New Model Army – a whole battalion of business models, split according to which of the above market changes they’re responding to. These tend to fall into one of two groups: customer-centric models and models that address interconnectivity.
Power to the people
Customer-centric models fall into three broad categories. The first of these is all about empowering customers. North American firm Direct Energy is one of a new wave of companies giving customers more flexibility.
The firm provides a range of plans, from fixed-rate contracts to bills tied to the gas markets. And that’s before you consider its partnership with Nest to offer ‘behind the meter’ products and services – helping customers to build a smart home and control just how much energy they use and when they use it.
Of course, not all consumers want the hassle of taking control. So, a second option for utilities is to offer value-added energy management. Utilities know the consumer like no other player in the value chain. This knowledge is priceless since it enables them to continue selling energy and then to play a proactive role managing energy use on customers’ behalf.
The third option for customer-centric suppliers is to offer a bundle of products and services. Often this means partnering with another firm in a related space to create additional value for customers by offering them more convenient and cost-effective ways to manage their lives. And this is already happening in four major ways:
- Electricity and EV charging, as seen by Alliander in conjunction with Allego and Motion
- Electricity and home energy services, as demonstrated by RWE’s SmartHome offering, which includes boilers and air conditioning system services
- Electricity and finance, wherein products like solar panels come together with financial instruments designed to manage investments
- Electricity and other services such as security, broadband or insurance. A prime example is ESB, which has partnered with Vodafone to offer mobile phone deals
Joining the dots
Other models address interconnectivity. One way is to take a leaf out of Uber’s book and build a supply network that can be turned on and off as and when it’s required. This is exactly what DONG Energy is doing with its virtual power plants. DONG operates a distributed network of generation sources, providing consumers with security of supply and the chance to profit from any excess power generated.
Alternatively, in environments where the implementation of distributed generation is high, we can adopt a “network manager” approach wherein suppliers manage all interfaces between local energy systems and traditional distribution grids, coordinating the needs of various market actors. This approach requires a solid set of data management and analytics skills along with access to the smart grid.
Then there are community energy models, wherein the entire community is involved in generation and distribution. This model is coming into play in Germany, where a number of bioenergy and eco-energy communities are beginning to have an impact.
So we can see the huge range of options for energy firms looking to carve out a space in the future. But pivoting a business is like trying to turn a large ship. It takes time and it’s not always smooth sailing.
Firms looking to move to a new model will need to make a number of changes. For one, there’s organisational issues and companies should consider whether they want to follow in the footsteps of EON and RWE by separating businesses that adhere to different models.
Then there’s talent. If a business is missing key competencies, it’ll need to fill that gap quickly or else the model will be unable to support itself. This could come in the form of new hires or through partnerships with disruptive newcomers. Such a move is intimidating to many CEOs but the alternative – being on the receiving end of their disruption – is much worse. Instead, this should be seen as an opportunity to work with and learn from start-ups to prosper together.
A changing business can and should run a pilot test when it makes its move. But there will still be huge risks. And there is little in the way of a safety net. There may be grants for technological development and subsidies for energy generation but no such support exists for business model innovation. And once a breakthrough is achieved, it isn’t protected. You can’t patent a business model. If you could, there would have been no new fast food restaurants after McDonald’s.
Nonetheless, the risks are worth it. The sector can’t afford to stand still and watch the march of technological progress pass it by. Instead it must deploy its New Model Army to deliver new revenue streams, decrease OPEX and drive commercialisation.
UK must stop blundering into high carbon choices warns CCC
The UK Government must end a year of climate contradictions and stop blundering on high carbon choices, according to the Climate Change Committee as it released 200 policy recommendations in a progress to Parliament update.
While the rigour of the Climate Change Act helped bring COP26 to the UK, it is not enough for Ministers to point to the Glasgow summit and hope that this will carry the day with the public, the Committee warns. Leadership is required, detail on the steps the UK will take in the coming years, clarity on tax changes and public spending commitments, as well as active engagement with people and businesses across the country.
"It it is hard to discern any comprehensive strategy in the climate plans we have seen in the last 12 months. There are gaps and ambiguities. Climate resilience remains a second-order issue, if it is considered at all. We continue to blunder into high-carbon choices. Our Planning system and other fundamental structures have not been recast to meet our legal and international climate commitments," the update states. "Our message to Government is simple: act quickly – be bold and decisive."
The UK’s record to date is strong in parts, but it has fallen behind on adapting to the changing climate and not yet provided a coherent plan to reduce emissions in the critical decade ahead, according to the Committee.
- Statutory framework for climate The UK has a strong climate framework under the Climate Change Act (2008), with legally-binding emissions targets, a process to integrate climate risks into policy, and a central role for independent evidence-based advice and monitoring. This model has inspired similarclimate legislation across the world.
- Emissions targets The UK has adopted ambitious territorial emissions targets aligned to the Paris Agreement: the Sixth Carbon Budget requires an emissions reduction of 63% from 2019 to 2035, on the way to Net Zero by 2050. These are comprehensive targets covering all greenhouse gases and all sectors, including international aviation and shipping.
- Emissions reduction The UK has a leading record in reducing its own emissions: down by 40% from 1990 to 2019, the largest reduction in the G20, while growing the economy (GDP increased by 78% from 1990 to 2019). The rate of reductions since 2012 (of around 20 MtCO2e annually) is comparable to that needed in the future.
- Climate Risk and Adaptation The UK has undertaken three comprehensive assessments of the climate risks it faces, and the Government has published plans for adapting to those risks. There have been some actions in response, notably in tackling flooding and water scarcity, but overall progress in planning and delivering adaptation is not keeping up with increasing risk. The UK is less prepared for the changing climate now than it was when the previous risk assessment was published five years ago.
- Climate finance The UK has been a strong contributor to international climate finance, having recently doubled its commitment to £11.6 billion in aggregate over 2021/22 to 2025/26. This spend is split between support for cutting emissions and support for adaptation, which is important given significant underfunding of adaptation globally. However, recent cuts to the UK’s overseas aid are undermining these commitments.
In a separate comment, it said the Prime Minister’s Ten-Point Plan was an important statement of ambition, but it has yet to be backed with firm policies.
Baroness Brown, Chair of the Adaptation Committee said: “The UK is leading in diagnosis but lagging in policy and action. This cannot be put off further. We cannot deliver Net Zero without serious action on adaptation. We need action now, followed by a National Adaptation Programme that must be more ambitious; more comprehensive; and better focussed on implementation than its predecessors, to improve national resilience to climate change.”
Priority recommendations for 2021 include setting out capacity and usage requirements for Energy from Waste consistent with plans to improve recycling and waste prevention, and issue guidance to align local authority waste contracts and planning policy to these targets; develop (with DIT) the option of applying either border carbon tariffs or minimum standards to imports of selected embedded-emission-intense industrial and agricultural products and fuels; and implement a public engagement programme about national adaptation objectives, acceptable levels of risk, desired resilience standards, how to address inequalities, and responsibilities across society.
Drax Group CEO Will Gardiner said the report is another reminder that if the UK is to meet its ambitious climate targets there is an urgent need to scale up bioenergy with carbon capture and storage (BECCS).
"As the world’s leading generator and supplier of sustainable bioenergy there is no better place to deliver BECCS at scale than at Drax in the UK. We are ready to invest in and deliver this world-leading green technology, which would support clean growth in the north of England, create tens of thousands of jobs and put the UK at the forefront of combatting climate change."
Drax Group is kickstarting the planning process to build a new underground pumped hydro storage power station – more than doubling the electricity generating capacity at its iconic Cruachan facility in Scotland. The 600MW power station will be located inside Ben Cruachan – Argyll’s highest mountain – and increase the site’s total capacity to 1.04GW (click here).
Lockdown measures led to a record decrease in UK emissions in 2020 of 13% from the previous year. The largest falls were in aviation (-60%), shipping (-24%) and surface transport (-18%). While some of this change could persist (e.g. business travellers accounted for 15-25% of UK air passengers before the pandemic), much is already rebounding with HGV and van travel back to pre-pandemic levels, while car use, which at one point was down by two-thirds, only 20% below pre-pandemic levels.