Market view: How utilities can create value

Falling demand for energy means utilities must seek alternative sources of revenue. Kirsty Ingham, David Borràs and Matthias von Bechtolsheim examine how they can achieve sustainable growth.

Electricity demand in Europe is down 5 per cent on 2010 levels, with up to 8 per cent declines in the major markets. US power consumption has been stagnant over the same period. Energy demand in developed markets is being driven down for many reasons, chiefly environmental, but the key fact is GDP growth in developed markets is no longer based in energy-intensive industries.

Utility chief executives are therefore looking to grow their top line outside the traditional asset base. The answer appears to lie downstream, in taking advantage of shifts in the energy mix and customer usage. Distributed generation in homes and businesses threatens utility revenues, and equipment OEMs are quick to take advantage of customer access to bundle power and gas contracts into installation and maintenance deals, but service provision in this field is also a new income source. Energy efficiency and management services offer further sustainable growth. Revenue growth for European utilities is estimated at 3-4 per cent overall in energy management and up to 8 per cent in energy efficiency services, versus declining revenue from commodity supply (see figure).

We see five essential focus areas:

• Get the basics right in the core business. This might sound like common sense, but the reality in large incumbent utilities is that they need to serve millions of customers and handle regulatory changes as they occur. Recent examples indicate that managing a customer care, billing and collection organisation without errors is not as simple as it seems. 
• Even large companies cannot compete with everyone – they need to pick their battles. However, incumbents are facing competition from other, similar players as well as from new, nimbler and focused rivals around each particular product or service. A focus on current strengths and competencies to develop value propositions is the pragmatic strategy.
• While large companies might have the resources to pursue many types of opportunities, some of the leading players in Europe are choosing to pursue one of the three following models: 
• a) Reliability of energy supply and related services; 
• b) Sales channel effectiveness to sell adjacent products and build a ‘sales machine’;
• c) Leveraging relationships and reputation with local customers and authorities to build presence in other services.
• Reorganise to build focused and performing businesses. The sales business of the future must change to align business potential, priorities and KPIs, along with the resources and capabilities for different types of businesses and ventures.
• Service development units innovate on new services based on engineering capabilities, software or hardware, or data combined from solution offerings. Product units develop and market standardised or customised solution offerings – commodity, services and integrated offerings as ‘modules’. Customer-facing units specialise to sell by main segment or channel, combining commodity and bundled services sales for B2C, B2B and the wholesale market. New services may need new channels or models, or even separate branding. Delivery comes from the operations and infrastructure unit, providing products and service value on central and distributed bases.
• New services often require new business models, and these business models sometimes require partnerships with others. Partnering can be an effective way to leverage others’ capabilities while focusing the organisation’s efforts on the aspects that are most relevant for the business.
• Make a commitment. Given the size of the opportunity but also the challenges, complete transformation of the business is required, from strategy, business models, people and processes to partners. This means full commitment of owners and executive management to drive transformation from the top. There is a large amount of uncertainty and a portfolio of options might look to be a good strategy for a large incumbent. However, instead of spreading risk, the outcome has historically been dilution of success.

In ten years’ time, the traditional commodity-focused retail business will not exist in its current shape. There is a window of opportunity in the next five years to achieve a strong position to pursue growth, or risk losing out to others as the integrated energy services player. This means a complete transformation of the business, to become agile,
learning and more efficient.