At SAP, we have for a long time drawn a line between deregulated competitive markets and regulated markets with vertically integrated utilities. However, when I look at marketing, customer sales and service operations today, I believe that this difference is disappearing.
Let’s briefly look at the regulated markets. Competition from technology and energy companies operating outside the utility sector has emerged in recent years. These new competitors cannot be regulated by utility commissions It is also quite astonishing that these effects are quite similar to what competitive retailers and distribution companies have been experiencing for some time. Moreover, it fortifies the belief that the traditional business model is in danger no matter what market structure is in place.
As a utility customer myself I can speak from personal experience. When I installed rooftop solar at my home this year I witnessed first-hand how confusing today’s regulations are. So many rules that intent to keep up with the rapid technological change while trying to salvage the traditional business model and finally also attempting to bridge the gap between what consumers desire and what utilities need to deliver. The results: Uncertainty for utilities and consumers alike.
What do we see in competitive and traditional regulated markets?
Revenues and margins from sales are shrinking while utilities face new requirements and competition from companies operating outside their strongly regulated markets.
The way energy is produced, distributed and sold is changing. This changes how utilities need to market, sell and service current and new offerings as well as how they need to organize their companies.
Utilities and retailers are targeting today’s and tomorrow’s consumers with innovative offerings and well-thought out marketing messages. Unlike in the past, not only bill-paying customers are in focus but all consumers.
These changes are happening globally. The trend might develop at different speeds in the regions.
I find Accenture’s study “The New Energy Consumer Handbook” a great read. If you don’t want to spend the time to read the over 200 pages, I would like to point you to a nice summary Accenture just recently published in the Intelligent Utility Magazine “Architecting for Consumerization”. You will find it on page 8.
In the North American press, maybe driven by its proximity to Hollywood, describes the trend as the “Utility Death Spiral”. The utility death spiral describes the “end game” of the developments described before where the century-old business model of the regulated utility market completely falters.
As we know, this business model is based on centrally produced energy supply distributed over a centralized grid to consumers. Revenue from selling energy to consumers then pays for operations and infrastructure investments over typically long timeframes of 20-30 years. Moreover, the prices are inflated to additionally provide profit to governments and investors.
I agree with many analysts and authors that utilities will probably not die completely. However, utilities are experiencing a partial financial exodus fueled by customer defecting from the grid basically using a competitor product instead of the utility’s. However, It will be just a matter of time until these revenue losses become critical for the utility. For example, lost revenue cannot be invested in infrastructure as originally planned.
Utilities are certainly aware of the developments affecting them. Recently at the North American SAP Utilities Conference in September, a panel of utility executives from electric, gas, and water utilities discussed the effects on their business today and they all agreed. The major factor that is driving change in their business are consumer wants and needs.
In the next part of this blog, we will dig deeper. We will look at several reasons for this development, competition being one of them, and why people (or consumers) are at the core of these brave new developments.