Utilities predictions 2018

James Forrest and Alain Bollack round up what the UK utilities sector should expect in 2018.

The utilities market is transforming. The UK has seen huge disruption in particular, with the growing number of new entrants slowly but surely gaining market share. Back in 2013 large suppliers accounted for 95 per cent of the market. That has now decreased to 82 per cent. 2018 will be certainly an interesting year to see if and how the large suppliers adapt. Here are three predictions that we think may play out as a result:

It’s about the money, money, money

Despite 2017 seeing a drop in energy prices from big name suppliers, some still struggle to meet the competitive prices of new entrants. As such, we predict a greater reliance on outsourcing to increase cost flexibility or perhaps even another  merger between large suppliers, like the one between SSE and Npower in November.

We have already seen a large acquisition last month with Shell entering the UK energy market and buying First Utility (which has been looking to diversify its consumer offering to compete with larger suppliers for a while). This could spark further M&A by large suppliers in response, as they need to find a way to circumnavigate the cost issues facing them.

That said, large suppliers could be at an advantage in early 2018 as the cold winter forecast may impact the profits of new entrants. This can already be seen this year, with energy supplier Future Energy ceasing trading as of last week.

If the demand for gas increases and the new entrants don’t have A strong trading position.Typically, large suppliers are in a more powerful trading position than the new players, and therefore may be in the perfect place to do better deals to not affect their profit margins.

The gap in customer service between new players and incumbent suppliers will increase over the next year

The utilities sector has spent a lot of time, effort and money to improve its customer experience and yet it is still viewed as the worst performing sector. This has meant falling customer loyalty and are now losing out to the new entrants who are more agile and neither weighed down by legacy systems nor poor reputation.

Targeting a smaller pool of consumers allows new entrants to create a more personalised customer experience, and being digitally native allows for a simple and streamlined customer journey, especially when switching suppliers or moving home.

Large suppliers must digitally transform their operating model within the next year or risk the gap becoming too large to close.

While this has been an ongoing process for a few years, they will have to double down in 2018. The big question for large incumbents is to find the quickest and most efficient pathway to extract themselves from this current negative spiral.

We are observing that large players are setting themselves three major goals: reducing costs, improving customer service, and increasing innovation.

However, most are attempting to achieve all three at once. This may not be achievable within the timeframe and it may be more advisable to pick one or two targets and focus on making sure those are successful before moving on to the next.

Large corporations will prepare to leave the Grid

While cost reduction and customer experience will be the main battleground, arguably the biggest disruption on the horizon is going to be large tech companies and customers leaving the Grid.

The price of alternative energy and storage has decreased significantly faster than first expected. Battery costs have decreased by 80 per cent from 2010 to 2016, with expectations that they will be at £140/kWh in 2020, and the automaker, Tesla, claims that further reductions are coming, anticipating that costs will drop below £ 74/kwh by 2030.

This has given large companies, such as Microsoft and Google, the opportunity to beginning testing ways to generate their own clean energy to become self-sufficient. For instance, Microsoft are testing wind farms to provide electricity for its data centres. This will cause a ripple effect, as smaller companies will watch what the bigger players are doing and will attempt to emulate as soon as the cost of renewables decreases enough to become competitive.

While this is the imminent danger for utility companies, they must also keep a close eye on homeowners looking to do the same thing. We are already seeing significant developments in home renewables, with products such as Tesla’s Powerwall 2.0 showing how far sustainable energy and battery storage has come in such a short amount of time.

While we’re still a few years off this becoming a viable option for the typical homeowner, we’ve certainly seen an uptick in residential homes taking up local generation over the last year, particularly solar energy. This is largely down to its decrease in cost by 89 per cent from 2009-2016, and is expected to decrease by another 59 per cent by 2025.

This should ring alarm bells for the utilities sector – they need to adapt to this coming change and start becoming the seller of renewables and battery storage, in order to remain relevant in the years to come.