The UK Government has fired the gun for the ‘new energy’ race, with a clear indication that it is putting flexibility closer to the heart of Britain’s electricity system. Starting guns have also been fired in a few other European countries with some races likely to start in the (near) future.
I think it’s a middle-distance race. It’s certainly not a sprint – it won’t play out that quickly, but it’s certainly not a marathon either (where the best tactic can be to let the front runners zoom off into the distance). In a middle-distance race you don’t have to be right at the front, but equally you can’t let the leaders get too far ahead. There’s a critical gap beyond which it’s hard to bridge back to.
It’s also essential to warm-up well.
There have been lots of runners on this particular warm-up, which has been quite extensive and far from a relaxed jog. There’s been considerable tension, with some participants showing off their capabilities. Just look at the number of companies now active in monetising flexible, distributed loads through ancillary services. But remember it’s only been a warm-up – many companies have struggled to make profits, sales have been pretty slow, and some have run off in completely the wrong direction.
So what strategy should be employed in this ‘new energy’ race? The ‘right’ strategy of course depends on a particular runner’s strength, but the strategy for new energy should have three key elements.
- Fantastic customer insight – much of which is built around insight from data
- Rapid development of new propositions and business models – often with iterations and pivots to incorporate learnings
- A frontrunner in optimising demand, storage and generation
Delta-ee’s sole mission is providing insight to help the energy sector succeed in the ‘new energy’ race. Years ago many of the companies we work with thought the race would only start far into the future (allowing for a lot of “training time” with R&D, five year roadmaps and multi-year pilots predominating). And many perceived it would be a marathon, letting the enthusiasts run off into the distance while the experienced start slow and steady with plenty of time to catch up. We don’t see the same attitude today. Our clients accept that the race has started, the pace is fast, and they have to keep up (and avoid running off in the wrong direction)!
So let’s briefly examine these three elements.
- Fantastic customer insight
The retail industry is far ahead of the energy sector in developing trusted brands that offer customers tailored propositions – the right proposition through the right channel at the time. Winners in ‘New Energy’ will rapidly get to his point by putting the customer at the centre of their business, and using multiple sources of data and insight to do so. Our model, below, sets out our view on how companies can utilise customer and other sources to data to create value.
Listening to what customers say is critical as well. Some customers are clearly ready for ‘New Energy’ – for example our research with over 30 business energy customers on their attitudes, perceptions and experiences with demand response revealed:
A desire for flexible and tailored solutions
The importance of transparency
Households are open to new relationships with energy as well – but have some clear concerns that need to be carefully addressed. For example, in testing auto-switching business models with our Customer Panel, as many as 70% of households found them attractive (the percentage varies according how the proposition is constructed). But when testing a ‘comfort tariff’ from electric heating with third party control, 63% had significant concerns about loss of control (interestingly, far outweighing the 12% who had concerns over privacy).
- Rapid development of new propositions and business models
Winning isn’t just about the technology – that’s often (but not always) the easy part – it’s about business models that provide compelling propositions for the customer, that are deliverable and scalable, and ultimately profitable. For example, our research on energy storage finds that simple ‘PV + battery’ propositions won’t be where the value is in the future, even if they comprise the vast majority of the ~74,000 residential batteries found in European homes (as of the end 2016). Already in Germany, where there are strong drivers for PV self-consumption, innovators are offering fixed electricity bills, using intelligent controls to maximise self-consumption and offer balancing services to the system operator. Complex on the inside, they are simple with a clear proposition to customers.
Through our analysis of over 100 innovators in new energy, we’ve categorised these business models into six pillars. There aren’t ‘best’ or ‘worst’ pillars, and some innovative business models span more than one. Our structure provides a framework through which to analyse the wave of innovation and draw our lessons learnt, insights, and successes.
- A frontrunner in engaging customers and in optimising demand, storage and generation.
‘Old energy’ optimises energy commercially in (very large) balancing groups, and at the TSO level. ‘New energy’ will optimise a range of diverse distributed assets and loads at multiple levels, building up from the household or commercial energy user, through to communities and microgrids, DSOs and the TSO. Winners will have deep knowledge of energy flows in buildings, how to optimise these with energy management systems, platforms that optimise across buildings, and monetising flexibility at different ‘levels’.
Our recent analysis of the Home Energy Management market shows that, across Europe, there is most activity today with optimising self-consumption from photovoltaics. This is real business for many, with over 30,000 optimisation products or services sold across Europe (largely in Germany). The numbers for those optimising (at the residential level) for ancillary services and to take advantage of dynamic tariffs is much smaller today, but will grow quickly – and possibly extremely quickly – as electricity markets are reformed (as per the recent announcement from BEIS).
The numbers for commercial and industrial energy users are becoming impressive today in the UK, with a surprisingly large number of players in the market. The value chain for optimisation is long and complex. Some players own the whole value chain today. Companies need to decide quickly where in the chain they are best placed to play – where do they have the right skills and a competitive advantage (or how could they acquire this).
We’re pragmatic. We know there is a balance between focusing on business today, and driving business for the future. But if you know you’re in the race towards ‘new energy’, companies have no choice but to run. The race isn’t just between ‘traditional’ energy companies. It is being run with newcomers as well, and companies from adjacent industries have already joined in some markets.
Drawing out the analogy one final bit further, many of these newcomers and new entrants seem to be in pretty good shape. They’ve trained hard and warmed up well. They’re not weighted down with the treacle and legacy of an ‘old energy’ business. They have a relentless focus in customers, employ new technology through innovative business models, and are often building great expertise in optimising energy. It is data that is coursing through their veins, at the heart of their fitness. The pattern of the races across Europe will be similar, even if their precise nature differs.
I think I’ve played with the analogy for long enough now – it’s been a fun way to explore the transition from ‘old’ to ‘new’ energy. I hope it has stimulated your thinking. Please browse our website to see how our research might help you to make this transition, and as always at Delta-ee we’re delighted to share our perspectives, hear your challenges, and discuss this topic together.