Murray Dyer, Commercial Director, Simply Energy
Murray Dyer, explains why 2016 is the year electricity market incumbents should be putting new strategies and business initiatives into action.
THERE ARE A NUMBER OF interrelated issues that are impacting the electricity market incumbents. By incumbents I mean both the traditional generator-retailer model and the network companies that have very material businesses and revenues to protect and, if they play it right, opportunities to execute if they can move their mindset from asset management to services and solutions.
The issue is – will 2016 be the year of continuing navel gazing about their role in a changing market, or will market incumbents actually put some new strategies and business initiatives into action? The decision to make no decision, and hope for the status quo, is not tenable.
Let’s recap on the things that are changing the environment and what that means for the broader industry.
Smart meter penetration and access to smart meter data has reached a critical mass whereby all retailers (big, small and new challenger brands) have access to accurate metering data for reconciliation and billing, and can provide more bespoke tariff structures against the actual profiles. This will provide reconciliation arbitrage opportunities between GXP residual profile loads and portfolio enhancing load profiles.
New regulations are being introduced that require retailers to provide detailed consumption information to consumers or their authorised agents (EIEP 13). This is a threat to the incumbent retailers as aggregation / tendering agents will be able to mine load profile data in a highly scalable manner to cherry pick customer profiles.
Embedded generation, solar, batteries, EVs and charging stations will require a different product set and tariff structures for both the incumbent generator-retailers and network companies. The challenging aspect is that these new products and services require a fully digitised strategy from sign-up, metering, through to customer billing, presentation and controls through smart phone and tablet apps.
Customer segmentation will mean that for a growing part of the market the cost to serve needs to be economic with 3000-4000kWh customers as opposed to 6000–10,000kWh customers. Therefore the ability to evolve margin from the packaged services, as opposed to the meters’ net kWh, will become critical for success.
The Electricity Authority has made it clear that it wants network companies’ line tariffs to better reflect their underlying costs. This means network tariffs will evolve towards charging on demand that varies through time (eg, weekday morning and evening peaks) and space (eg, by GXP). This type of charging means the marginal cost of electricity will vary massively to almost free at night to many $/kWh making load management technologies much more attractive.
ASX futures price and the introduction of the 0.1MW (mini contracts) enhances the ability for existing Fixed Price Variable Volume (FPVV) tariff buyers and new entrant retailers to more effectively hedge their position and increase the level of competition and options for consumers.
Energy efficiency and demand management through EECA initiatives and increasing capability with more scale from energy consultants, together with Transpower’s Demand Response programme, has started to convert this from a great idea to commercial reality. And of course, the Internet of Things, smart meter data, and embedded generation solutions will come together into consumer applications to manage and monitor their energy requirements and costs.
The interesting dynamic in this will be the role of the network companies.
After many years of focus on the high voltage lines within their networks, together with the large connections and controlling demand around the Transmission Regional Coincident Peak Demand periods, they will now need to evolve and move their focus to the individual points of connection. This is easier said than done, as if the network company does not have an interest in, or direct access to, the smart meter data for the ICPs on their networks, then it will be challenging to have the requisite data to determine appropriate network pricing to protect revenue in this evolving market. Ideally they will require this data at the ICP half hour channel level (to understand controllable load).
Where the network companies do have this access, then the next logical step is to offer unregulated consumer products and services. The reforms to the Electricity Industry Act 2010 cleared the way for this and, along with the new entrant challenger brands, there will start to be competition within the incumbents to own the consumer. This is especially relevant for those trust owned network companies.
However, the incumbent generator retailers have a very strong position and, across the board, they generally have strong balance sheets, cash flows, existing systems and processes and a wealth of market and consumer data that they can put to good use to defend their positions and grow their businesses.
So where to from here?
The incumbents will need to make some calls, endless strategy sessions will need to give way to action that will require them to try some different products and services and acceptance that not all of them will work.
We may see a bolder strategy from one or more of the incumbent generator-retailers to establish a solutions business, and leave the traditional assets and retail business as a cash cow and leverage the balance sheet to fund a completely new business model. This strategy has been adopted by Eon, the large German utility company that has split its business with a new Eon, that is consumer driven solutions. This is all being run from a completely new entity and team, with innovation and technology experts from within and outside the sector, whilst their traditional generation, poles/ wires and retail business has been put into a business as usual status to optimise free cash flows to build the next multi-billion dollar energy solutions company.
The incumbent retailers will need to develop more agile and flexible technology options that can support fast low cost entry to test new products and services before they scale.
The industry participants will start to implement more partnerships and combine the culture of a large going concern with the culture of disruption and innovation. We think the incumbents will develop innovation hubs that will implement new business models and commercial structures with non-traditional partners.
The technology solutions to support these new ventures and business models are unlikely to come from the incumbents themselves, but be provided by new entrant solution and technology providers.
These issues and way forward are not unique to New Zealand. They are being worked through across a number of energy and utility markets, the new technology impacting the market is a combination of international trends, new intellectual property (such as embedded generation, battery and electric vehicles and energy control applications along with more energy efficient appliances), and locally developed solutions and technologies applied to local market conditions.
The incumbents’ role is to develop, test and adapt the right solutions, but most importantly have the will and the capability to execute on their strategy.
So we will see greater cross pollination of ideas and movement of people from and across different sectors; and different market participants and service providers enter into the electricity industry, which is all pretty exciting stuff!
If you would like to debate or discuss any aspect of this article then don’t hesitate to contact Murray Dyer at email@example.com or 09 309 2290.