The percentage of respondents who use big data only to reinforce knowledge of operational processes, shows that use of data analytics is not yet being optimised.
From our research conducted with IDC Energy Insights, we know that a gap is incresing between the best in class utilities players and the industry average.
Based on the emerging models of micro-grid operators, energy data aggregators and demand respond managers, we identify principles utilities companies can take in order to stay ahead of what could prove to be a turbulent future market.
What will Europe’s utilities sector look like in 2030? Our research sheds light on a smarter, decentralised market that will place the customer at the heart of the business model. The inaugural BearingPoint Smart Utilities Index shows the competencies utilities need to address the dramatic overhaul facing the sector by 2030.
Gerhard’s systems have analysed weather forecasts and his personal needs – heating, lighting, appliance use and driving routes – and recommend that he sells back one third of the power in his storage units during the peak incident at a preferential sale rate offered by his energy supplier.
At lunch Gerhard reviews his local energy newsletter, noting that his next door neighbour won a weekly supply efficiency contest using an alternative supplier with more flexible options. After analysing the savings he could make based on his own usage patterns, he switches to his neighbour’s supplier with a single click using an energy comparison app on his smartphone.
With increasing competition, we need to be more customer-centric and we also realise how much we learn from our customers through studies and workshops.
DR STEPHANIE ENGELS, HEAD, CORPORATE DEVELOPMENT, EWZ
He then clicks through to information about the latest energy-saving devices. Reviews are read and simulations are run to see how quickly their initial costs would be paid off due to efficiency gains. He logs the results ready for that evening’s Neighbourhood Energy Management Association meeting, where attendees will be reviewing upgrades to the community micro-grid.
We define the utilities segment as covering energy generation, transmission and delivery, production and distribution of water (and the treatment of waste water), collection/treatment, and recovery of waste – that is, the management of resources. Although this paper predominantly focuses on energy, many of its conclusions also apply to other sub-industries, such as water and waste. Against a financial background that is still challenging, three factors are conspiring to drive changes across this complex and fast-evolving landscape:
While existing utilities may currently 'own' a relatively captive market compared to other industries, challenges of consolidation, fragmentation and innovation mean that not every organisation can win
As they look to respond to these challenges, utility firms find themselves hampered by an array of complex reasons. The sheer size, scale and complexity of electricity distribution, challenges of working with old and unreliable infrastructure, social history, the burden of public services, the enormous capital costs and associated financial flows all add to the overall challenge. Whilst they look to innovation for answers, margin structures around existing business models mean that there is not much money to splash around.
In a recent turnaround situation, we secured a competitive supply source, made double-digit percentage quality improvement, as well as seeing a major improvement in the supplier's own profitability and cash flow - the supplier became cash positive for the first time in four years.
BUSINESS DEVELOPMENT EXECUTIVE, GLOBAL CONSUMER GOODS COMPANY
While today’s market leaders are keen to maintain their status as major players for resource management and delivery, a number of start-ups in the sector are bringing the fight to the traditional incumbents using state-of-the-art technologies and the latest business models and cost structures, including:
There will be significant and continued growth by acquisition, making the competitive landscape even more complex. The recent acquisition of ‘smart’ thermostat company Nest (at a cost of USD 3.2 billion for the three-year-old start-up with over 200 employees note 2) revealed Google’s hand as a challenger. This example illustrates dynamism in the marketplace; similar cases are emerging all the time.
While existing utilities may currently ‘own’ a relatively captive market compared to other industries, challenges of consolidation, fragmentation and innovation mean that not every organisation can win. Data ownership is becoming a significant source of competitive advantage; traditional providers risk being replaced by their historic clients, such as municipalities and industrial customers, by having a third party capturing the management of data. In many cases, not knowing what is coming means utilities are not acting at all.
Please note that in this report we focus primarily on changing market dynamics. We do not directly cover the parallel, regulatory progress that is taking place across and within European countries, which is also having an influence on the utilities landscape.
The first edition of the BearingPoint Smart Utilities Index was devised from a survey conducted with IDC Energy Insights of 40 utilities firms from France, Germany, Italy and the United Kingdom in January 2014. BearingPoint’s experience of best practices in the European and US utilities landscapes was used as the basis of the index, later backed up by qualitative interviews with utilities leaders from the above countries, plus Ireland, Switzerland and the USA to build the final version. In the remainder of this section we look at how organisations currently fare across the five competencies of the index.
Even as existing business models crumble, different situations and a wide variance in contextual factors across Europe and the rest of the world make it difficult for any organisation to adapt a systematic approach. Utility firms are confronted by open questions such as:
Few utilities use big data to personalise services: only 28% use them to personalise tariff plans and 33% to propose personalised services
How can companies answer these questions? Based on extensive research and our experience of working with clients, we have identified five different competencies that, taken together, dictate a utility firm’s ability to respond to the changing market landscape:
Figure 1: Utilities have a long way to go to tap into potential opportunities
BearingPoint Smart Utilities Index 2014: scores by competency area for all respondents
The percentage of respondents who use big data only to reinforce knowledge of operational processes, shows that use of data analytics is not yet being optimised.
While big data – the analysis of large volumes of data to generate business value – is currently a hot discussion topic across utility firms, its actual use is limited. The foundations are there – existing technology investments already enable the storage, collation and analysis of various types of data. Indeed, 92% of organisations we surveyed indicate they are using complex predictive models, within which:
Electricity storage under houses can account for up to nine-tenths of its consumption needs, according to Dr Walter Steinmann, Director, Swiss Federal Office of Energy.
All the same, utility firms are still not maximising the benefits of data analytics, which is mainly used for operational aspects:
Few utilities use big data to personalise services: only 28% use them to personalise tariff plans and 33% to propose personalised services.
The firms we spoke to recognise that this situation has to change: as we can see in figure 3, they clearly see the impact of big data on their business model.
The ability of any organisation to establish new relationships and modify existing ones will become paramount
Virtual and flexible system
The commoditisation of traditional services – provision of gas, power, water and so on – has driven utility firms towards efficiency. As companies have increasingly focused on more standardised, low-value maintenance tasks, they have left more fine-tuned management of assets to third parties. The result has been that utility companies have been losing control of strategic resource management, with a consequent direct impact on margins.
In response, organisations recognise they need to deliver higher levels of service, based on open, flexible systems that can link into a wide variety of generation and transmission resources.
In the future, we may see ‘virtual’ power plants competing with traditional power generation – indeed, this is already the case with the competition between megawatt and ‘negawatt’ (a theoretical unit of ‘energy saved’) providers in markets that are not ‘energy-only’ (note 3). In the USA, for example, demand response management (DRM) providers such as EnerNOC and Comverge are offering alternatives to direct generation (note 4) – we look at DRM in more detail below.
Micro-grids and nano-grids
Micro-grids, and still smaller nano-grids, offer SME energy producers and consumers more direct control over locally generated energy. An important driver is the increased decentralisation of energy storage, says Dr Walter Steinmann, Director, Swiss Federal Office of Energy: ‘When building a house today, for ten to twenty thousand Euros one can incorporate electricity storage under the house. Not only can customer consumption be optimised, but it is also possible to set up an agreement for the local provider to use the storage. Such storage can lead to producer–consumers meeting 80–90% of their own consumption needs, instead of 40–50%.’
Based on our research, while 25% of utilities currently offer services for micro-grid or nano-grids management, only Italian and German respondents were seeing direct revenues coming from such services. The most significant source of service revenues is coming from smart buildings, followed by smart cities and local communities, respectively.
Horizontal and open organisation
Given that the complex and quickly changing nature of the future landscape, the ability of any organisation to establish new relationships and modify existing ones will become paramount. While most European utilities have come from a historically nationalised or semi-monopolistic incumbent position, they nonetheless recognise the need to develop broader industry partnerships and open the organisation to more collaborative working practices with a range of stakeholders. How are organisations delivering on this aspiration? The view from our research reflects a work in progress. In other words, while the will is in place, much work still needs to be done for utility organisations to become able to respond to new partnership opportunities and to derive business value from them. Particular effort needs to be put into engagement with newer types of organisation, such as digital players and start-ups.
Firms offering customised service plans in the B2B market, indicating a significant unused opportunity.
Customer engagement and confidence
As we see in figure 5, utilities are keen to develop deeper relationships with their customers (in turn responding to increasing expectations of engagement from customer groups), using a variety of channels:
This represents a wide variety of scenarios for utility firms to (re-)engage with their customers. In the Netherlands, for example, the utility company Essent launched a challenge to the broader community to develop new mobile apps using data available from smart meters.(note 5) The opportunity is also growing for utility firms to offer customised service plans and influence customer behaviour, particularly around energy efficiency. However, only 45% of respondents said they were doing so in the B2C space – this number falls to 27% for B2B customers.
In summary, how do today’s utilities stack up? According to our Smart Index findings, best-in-class organisations are able to differentiate themselves across two axes, namely:
Each engenders a spirit and practice of relationship building, based on looking outside the organisation for answers – a very different perspective from the introspective nature of traditional utilities. The new breed of challengers are natively customer oriented, and therefore do not have to weigh up whether or not to engage with customers and partners to innovate and grow – they are already doing it.
Less of a gap exists between best-in-class and average utilities providers in terms of other axes, incorporating the ability to leverage big data, flexible business models and use of micro- or nano-grids. At this time, traditional utilities are advancing at the same pace as start-up challengers, meaning that the same opportunities to build competitive advantage present themselves for each group.
Based on the BearingPoint Smart Utilities Index model, what is the optimal mix of capabilities for future organisations? The transition towards decentralised energy generation and distribution, coupled with the revolution in smart and digital technologies, is catalysing the creation of multiple provider types with specific competencies. As well as traditional generation infrastructure providers (offering services to help local producers build and run their energy infrastructure), we have identified a number of emerging business models that will characterise the utilities players of the future.
The transition to these new models yields new opportunities for organisations looking to position themselves in the future utility marketplace.
The new breed of challengers are natively customer oriented, and therefore do not have to weigh up whether or not to engage with customers and partners to innovate and grow - they are already doing it
Micro-grid operators (MGO)
Micro-grid operators will not own generation capacities but will work alongside local and independent energy producers – such as real-estate owners or local authorities responsible for energy-producing buildings, farmers producing bio-methane, and so on – to harness the power that these sources generate. As these producers are not energy experts, MGOs will oversee local production from a technical and operational point of view, offering advice and assistance where necessary.
At least initially, the main customers of MGOs will be producer–consumers – that is, consumers who also produce energy. MGOs will help these producer–consumers to optimise their energy systems, taking into account their generation capacity for each energy type and their own needs, for example in terms of peak energy requirements and daily usage. As independent producers and producer– consumers grow in number, so will the MGOs.
Which competencies should MGOs develop?
Given that MGO revenues will come mainly from selling expertise and services, they will need to develop the capacity and know-how to design and build custom solutions for producer–consumers and independent producers. This means understanding the technologies involved in micro- and nano-grid generation, keeping up to date with advancements as these areas evolve (see figure 8). In addition, MGOs will need a high level of flexibility to respond to both technology and market changes, in order to help their customers optimise their own production systems, whilst taking into account the state of the larger energy distribution network.
Energy data aggregators
As the number of energy-connected devices (generation and metering) and energy-consuming equipment in homes and business premises grows, so does the need to monitor local distribution equipment. A key role of the energy data aggregator (EDA) is to provide a clear overview of the local distribution network, which will require both a general understanding of customer usage patterns, as well as specific customer utilisation needs, such as heavy use of computer equipment or domestic appliances.
As a result, EDAs are important digital players, anticipating user actions and accurately predicting the energy consumption of each customer compared to the overall market by the collation and analysis of all available information. This can be sold as a data service to:
Which competencies should EDAs develop?
A primary element of the EDA skill set is data analytics, in terms of data-science expertise and an understanding of the technologies required to collate, analyse and act on the large quantities of data that are generated and used. EDAs will also need to act in a horizontal and open manner, as their role will involve extensive partnerships, not least across a wide variety of data creators, equipment companies and smart-building technology vendors.
Demand response managers
The energy grid continues to fragment and decentralise: there are increasing tensions between demand and supply management. There are also governmental regulatory pressures to decrease energy consumption. These factors mean that the role of managing demand at local, regional and pan-national levels becomes increasingly important. As such, demand response management (DRM) services – the ability to offer customised energy usage pricing, based on a customer’s requirements and abilities to conserve, store and generate energy – present the best opportunity in the overall future energy market.
Demand response managers can, for example, propose ‘peak-time agreements’, where customers are given advance warning of the need to reduce power usage. Customers can be incentivised to use energy at certain times of day through creative rate structures and pricing, or even through a real-time pricing assessment – messages such as ‘Energy is cheap right now, you can charge the car’ may become commonplace.
Demand response managers may also offer direct-load control services to customers for power-intensive devices (such as heating, ventilation or air-conditioning equipment); for example, turning them off for short periods to reduce energy usage when demand is high.
Whereas traditional revenues have come from sales, grid generation and the trading of energy as a commodity, future DRM revenues will come from 'real-time supply/demand coordination', for example, measured in terms of the value of negawatts (non-consumed watts).
Which competencies should DRMs develop?
As they provide the link between supply and demand, DRMs will need a clear overview of the dynamics of the energy market as a whole, as well as understanding precise customer usage patterns, to enable the creation of products and services closely adapted to customer consumption habits. This bridging role will require strong competencies in big data analytics and product/service design.
As well as requiring partnerships with suppliers and EDAs, DRMs will also need strong customer-experience management competencies, for example to enable the enrolment and engagement of customers in energy efficiency programs.
Ten years from now utilities will have become quite different businesses than they are today. New models will define internal structures and external relationships, offering new ways to create value in a mature and highly commoditised market. Existing players will have to move fast, however, as new, potentially more agile entrants are already positioning themselves to take advantage.
Given that all parties have an equal chance of gaining market share that is available on the table right now, what can traditional organisations do to orient themselves better? We believe such firms should start by concentrating on the consumer perspective - rather than seeing new competitors, technologies and operating models as a threat, the question to be asked is, 'How can we reach out and connect better with our customer base?'
To help towards this goal, we make the following five recommendations:
‘The rapidly growing number of decentralised energy suppliers won’t lead to the disappearance of centralised energy suppliers, as they will still be needed. Therefore, a healthy balance between centralised and decentralised producers must be found. The unavoidable consequence is that large centralised energy producers must resize, readjust and adapt to the upcoming market changes.’ Dr Martin Everts, Head, Energy Economics, Axpo, Switzerland
Given that launching of new services will accelerate, develop new innovation processes such as ‘test and learn’; look at short-cycle product development and other new working practices.
‘The bulk of transactions that are finalised over different time periods with different clients in an increasingly volatile market require an efficient management of those transactions. For instance, if we finalise a five-year contract with a client, a three-year contract on a power exchange to auction my power day ahead, and a one-hour intraday (or even a 15-minute intraday) to buy it back. So different time frames, different strategies, which require several internal competences, that if played right, the company can be very successful.’ Senior Manager, energy provider
Ten years from now utilities will have become quite different businesses to today, as new models define internal structures and external relationships, offering new ways to create value in a mature and highly commoditised market
'Customer orientation will be a core focus in the future. So far, only 50% of the market has really opened up. By the latest, in 2018 there will be a complete opening of the market. Customers are many small actors in the market that need to be managed individually, so being close to the customer will benefit customer satisfaction.’ Dr Walter Steinmann, Director, Swiss Federal Office of Energy
Customers are many small actors in the market that need to be managed individually, so being close to the customer will benefit customer satisfaction.
DR WALTER STEINMANN, DIRECTOR, SWISS FEDERAL OFFICE OF ENERGY
‘We anticipate the utility [firm] of the future to be flexible, connected and, above all, decentralised and part of an open ecosystem. Cloud, mobile, big data/analytics and social technologies will transform how utilities engage with customers, the speed at which they deliver their products and services, how they innovate, their resilience, and the reliability of their operations’, Roberta Bigliani, Associate Vice-President, Head EMEA, IDC Energy Insights
The global transition towards more intermittent electricity flows from increasingly decentralised sources, coupled with increased use of renewable energy, is driving the need for flexibility and efficiency across the grid. These drivers will bring locations for generation and consumption closer, based on intelligent energy production, storage and consumption.
In parallel, the deployment of sensors and meters, coupled with increased communications bandwidth and availability, enables utility companies to add an information layer to those of traditional energy and water networks. This gives the opportunity to increase operational efficiency and quality of service, while offering added-value services to customers.
The result is an explosion of energy, water and environment data, opening opportunities for traditional utilities and new competitors. Meanwhile, the demand response market will grow and attract new high-tech players who will act as intermediaries between customers, energy suppliers and systems operators.
We expect to see end-customers of all sizes – industrial and commercial consumers, real-estate and property managers, and local government players owning their own generation and storage capacities – play an increasing role in energy management. Stakeholders will be increasingly empowered but will have to acquire new skills. For example, local governments will be provided with modelling, planning and monitoring solutions to support local growth and foster economic development.
Citizens and consumers will be empowered as energy producers, with energy usage feedback so they can control when to use discretionary loads, such as electric vehicle charging. While they will be more closely monitored, they will become activists, as illustrated by the crowdsourcing of location data (e.g. Green Map note 6) or the gamification of resource awareness (e.g. Recyclebank note 7).
A significant consequence is that data will be seen increasingly as public, and will need to be standardised. Utility companies will need strong data analytics capabilities to forecast and monitor a diverse pool of resources in near-real time. Competitive advantage will require combinations of added-value services and innovative tariffs that can only be provided with advanced metering capabilities and digital technology.
Will we see the same behaviour and pace of change in developed and emerging countries? We might see the same revolution in emerging countries as occurred with mobile telephony. Is there a strong business case for smart infrastructures mixing clean technology and traditional infrastructure? This is could become the great challenge of the next two decades.
Cloud, mobile, big data/analytics and social technologies will transform how utilities engage with customers, the speed at which they deliver their products and services, how they innovate, their resilience and the reliability of their operations.
ROBERTA BIGLIANI, ASSOCIATE VICE PRESIDENT, HEAD EMEA IDC ENERGY INSIGHTS
‘A key competence for the new “energy market and client approach” will be to optimise energy – including the management of both supply-side and demand-side equipment – regardless of where it is produced, or by whom’ Chief Financial Officer, sustainable energy distributor
The bottom line: move quickly or fail slowly
For today’s major utility organisations to remain in the game, they will need to deliver on all five axes of the BearingPoint Smart Utilities Index and do so before the new breed of competitors become more than minor distractions. Time is not on the side of larger organisations, however, which are not known for their agility.
This is in part down to the nature of utilities infrastructure, which cannot (and should not) be expected to operate in a reactive mode. However, the story is different for information-driven and customer-facing parts of the business. Perhaps it is this side of the business that can move more quickly, seizing the nettle even if the infrastructure side of utility businesses finds it harder to react.
Utility companies can either choose to move quickly or fail slowly – no other option exists. Equally, there is nothing to stop organisations from acting as if they are start-ups. For example, they can create innovation centres, which can operate at a distance from any backward inertia that may exist close to the core of the business. Additionally, there is nothing to stop today’s organisations from developing a vital level of expertise around how to maximise the benefits of information, directly or through partnerships, based on collaborative, open technology platforms.
For utility companies, ‘information’ really does mean ‘power’, as the coming battleground will be based on information and the ability to act upon it quickly enough. While existing utility companies may have been accused of being monopolistic in the past, no organisation has a monopoly on the future.
Nothing stops organisations from acting as start-ups, for example by creating innovation centres to remove any backward inertia that may exist close to the core of the business
Jack Winter, Senior Principal and Will McNamara, Senior Manager, of West Monroe Partners
As the graphic shows (note 8), (note 9), the US utility sector is a complicated landscape. Instead of a single incumbent utility per jurisdiction, the USA has a multi-tiered set of investor-owned, municipal, and cooperative organisations. Instead of a single regulator, the USA has 51 independent and non-aligned state regulatory jurisdictions, policy makers, and state legislatures.(note 10)
Whilst the US electric industry is organised and regulated quite differently to EMEA, the same drivers that impact European utility companies are fundamentally altering business models, regulation and customer interactions across the country. These drive a disjointed mix of stakeholder expectations and produce widely varying responses from utility firms, occurring at different speeds.
A prominent area of federal government success is the acceleration of grid modernisation, with over USD 10 billion in grants. Another focus area is the reliability and security of the bulk power system, promulgating standards, audits and mandated training across the country (note 11). This mix of federal encouragement and oversight is turning the USA into a living ‘test bed’ for new technologies, advanced systems, and customer-facing applications (note 12).
The USA does lag behind Europe, however, in integrating renewable resources and micro-grid generation, as the dominant investor-owned utility (IOU) sector is risk averse and its state regulatory model is slower to respond to technology and market forces. As utility companies struggle to produce a regulated revenue stream, prices increase and the advantages of alternatives become greater. Poor sales figures drive up prices further, resulting in the ‘utility death spiral’ (note 13). The widening variety of business models offers optimism that this cycle is not inevitable, but it remains a concern (note 14).
An increased data focus is driving changes in processes, roles, employee skills, and customer relationships. Rising concerns over data privacy and cyber security are creating new markets and products and are also influencing public policy decisions (note 15). Increased information availability is coupling with the rise of mobile devices and social media to increase consumer expectations and activism levels (note 16). Experience shows that consumers respond positively to incentives and increased information about their energy consumption. Improved customer communications and data from two-way meters also provide benefits during outages and natural disasters (note 17).
US and European utilities can become smart integrators, energy service aggregators, infrastructure operators and information managers through a combination of the following initiatives:
The research provides insight into the future of the utilities market by asking executives and managers of utilities companies from across Europe to predict how the influence of new energy mixes, big data analytics and smart-city initiatives will affect their companies’ business models.
A quantitative survey was conducted in close collaboration with IDC Energy Insights, a provider of market intelligence, advisory services and events for the information technology, telecommunications and consumer technology markets. The findings of the article are based on a survey with respondents covering 40 utilities companies – each one employing at least 500 staff – in the UK, France, Germany and Italy. The survey was conducted during January and February 2014. This survey was complemented qualitative interviews provided by West Monroe Partners: a US consultancy firm focusing on M&A, customer experience, operations excellence and advanced analytics across a number of industries. The result was the inaugural BearingPoint Smart Utilities Index, which evaluates utilities companies across five competencies.
Nick Dussuyer, Marion Schulte, Jens Raschke, Peter Minogue, Adrien Mathieu, Fabien Scemama, Michael O’Dwyer, Samyr Mezzour, Ekaterina Grebennikova, Alex Piper and Mark McAleer from BearingPoint.
The authors would like to thank all the interviewees for their time and for the quality of their contributions to the article. They would also like to thank IDC for its partnership in conducting the research; Will McNamara and Jack Winter, from West Monroe Partners, who have been valuable contributors in helping us to understand the US utilities market and so broaden the scope of our study; Jon Collins and Michael Agar, for bringing the article to life; and every member of the European project team who contributed their insight and expertise (including the BearingPoint Institute team, for their patience and perseverance). Finally, a special thanks to Marie-Anne Brodschii, who was the inspiration for the very first version of this study.