Can technology enable the return of the multi-utility model?

Better technology and data quality could revive the multi-utility, say Yunus Ozler, Simon Cox and Paul Rees Jones.

Change is nothing new for utilities. In the past decade, this change has accelerated with the rise of internet comparison websites and an increased focus on digital channels. Throughout this period, the traditional energy retail model has prevailed.

However, there is an increasing belief that this model is now being challenged globally by advancements that lower the cost of technology, as well as by customer and shareholder expectations.

For example, falling technology costs and supporting regulatory incentives have led to the exploration of distributed generation. In Germany, an early adopter of the technology, distributed generation accounts for 48 per cent of the installed capacity, as reported by EY’s Utilities Unbundled publication.

Smart technology adoption is also accelerating. Globally there are five billion smart devices, excluding phones, tablets and PCs. This number is expected to increase to 25 billion by 2020. Smart thermostat adoption alone is expected to reach 64 per cent and 46 per cent in North America and Europe, respectively, according to RBC Capital Markets’ 2015 estimate.

The quantity of data is also increasing, alongside the ability of companies to collect, process and analyse it. In 2013, 90 per cent of the world’s data had been produced in the previous two years.

These trends are strengthening the concept of the “multi-utility”, in other words broadening the scope of the utility away from its traditional core. Within the multi-utility, three business models have started to emerge: the utility aggregator, the energy optimiser, and the connected home.

The utility aggregator is the most traditional of these models. It involves creating a bundle of products such as water, electricity, gas and telecommunications. The appeal for the energy customer is that the monthly outgoings are simpler to manage, and the combination of services creates economies of scale, allowing for larger discounts.

Globally, the concept gained traction in the Netherlands in the 1990s with companies such as Eneco offering gas, electricity, TV and fixed line service. An example in the UK is Utility Warehouse, which offers home phone, broadband, mobile, gas and electricity as a bundle. It has been growing steadily and has doubled the proportion of new customers taking on all five services since 2014.

While the utility aggregator model seeks to gain customers by reducing prices across a bundle of home utilities products, the energy optimiser attempts to capture the broader energy space, reducing customer energy prices through a better understanding of the energy ecosystem. This involves utilising everything from distributed generation through to data from smart meters.

For example, in the US, SolarCity offers a full range of services across the distributed energy value chain, including system design, asset financing, installation, monitoring, maintenance and virtual power plants.

The final model, connected home, is based on data and technology, connecting devices to provide customers with control and optimisation solutions. A proposition in this area typically includes energy management, lighting, security and appliances.

This is a space where traditional utilities could be set against major technology players. Google, for example, has gone down the hardware route, initially with investment in the smart thermostat Nest and subsequently with Dropcam, a video-monitoring solution. Apple has taken a software-heavy approach with its HomeKit platform connecting Apple-approved devices and applications. Utilities have to articulate clearly how they will differentiate from the competition in this space.

The battleground is set for these multi-utility business models to further emerge and compete. Change at this pace and scale provides a unique opportunity for the utility of the future to innovate and create differential returns for its customers and shareholders. While it is too early to say which will eventually come out on top, the eventual winner will be the company that truly puts customers’ energy needs first.

Yunus Ozler, partner, Simon Cox, senior manager and Paul Rees Jones, manager, all at Energy Advisory Services, EY