Power and utilities sector near tipping point as smart future beckons
US$200b of investment will radically alter a century old business model
London, Dusseldorf, Moscow, 22 April 2010 ― Seeing energy differently, a new Ernst & Young report released today, analyses a sector on the point of massive change with a new consumer model, new entrants, new services and new ways of delivering them.
As the sector prepares to invest more than US$200b over the next five years to radically overhaul its infrastructure and metering, the study highlights how a traditionally conservative industry is at a tipping point in its relationship with its principal stakeholders.
Ben Van Gils, Global Sector Leader for Power & Utilities at Ernst & Young, explains, “Power and utilities is a traditional industry with a business model that has changed little in the past 100 years. Companies both within the sector and potential new entrants are now seeing a once in a generation opportunity – the so-called smart revolution – with the onset of new technology and new consumer expectations.”
Ben continues, “Smart is not just an infrastructure upgrade. These changes have the potential to transform power and utilities companies’ strategy and their entire way of working.”
A greener and interactive model?
The report focuses on how the role of a traditional power and utilities consumer is already changing. Instead of simply being a recipient of utility services, consumers now have the opportunity as a producer, albeit on a micro-generation scale, of power. Many consumer groups hope that the introduction of the smart infrastructure will result in a greener world that also provides more secure and affordable electricity.
Ben comments, “Smart will allow consumers to control their power consumption through real-time information on energy consumption. They will be able to choose sources of energy and take a more active role in how they use power and when. This will enable them to reduce their total energy consumption and change the timing of their consumption to avoid periods of peak demand and high prices.”
New players in town?
The new smart world will include new entrants from sectors as diverse as retail, automotive, technology and telecommunications. This is already happening with traditional players like RWE partnering with Microsoft. As the market turns on its head, particularly in unbundled markets like the UK, the likelihood of a Google or a Tesco stepping in with new add-on services, and possibly even direct energy supply, becomes more of a possibility. Several alliances that have already been founded to drive the deployment of smart technologies, such as GridWise, IntelliGrid, ADDRESS, and the European Smart Metering Alliance, also demonstrate the potential for partnering in the smart arena.
As Ben explains they will bring valuable experience from the transformation in their own sectors: “We will see new players who have learnt from the radical transformation of their own sectors entering the power and utilities space, whether as partners or sole providers.”
What can power and utilities learn from other sectors?
Although there remains great appetite among sections of consumers, particularly early adopters, for new innovative ways to receive content or services, utility players should also be wary of residual skepticism and concerns. In particular, providers should not promise more than they can deliver. Lessons learnt from the launch of 3G mobile technology are a salutary lesson. Despite the huge amount of debt companies took on to launch the networks, it has only really been with the launch of the iPhone, nearly a decade later, that mobile internet has really taken off.
Ben comments, “Power and utilities companies – whether old or new – need to paint a picture of what is possible in the new smart world without overhyping it and leaving consumers disappointed. At the same time, customers will become more demanding, and more transient and the companies that provide their services will have to be equally nimble in reacting”.
What will be the tipping point?
Experience from the technology sector demonstrates that companies have to distinguish between market hype and the effective capabilities of a new technology or business approach. Timing is everything in technology, as change can happen overnight. Technology companies have learned to perform extensive due diligence to understand the strategic timing of market entry for specific products and services.
Ben explains, “Getting the timing wrong – by entering the market too early or too late – can result in stranded investments or missed revenue opportunities. Technology leaders have become adept at spotting tipping points. In Sweden and parts of United States, Canada and Australia we may already have reached that point, but for the rest of the world companies will have to learn the ability to read the market far more closely. They may have to rely on external partners from technology or other sectors to help them.”
The tipping point could be caused by the introduction of just one product or service that customers really want – the “killer ap” in software and technology terms. For the gaming industry for instance that killer ap is Wii, but there are many other examples in other sectors, e.g., the Google search engine for the internet, or the Ford Model T, the first affordable car that enabled a breakthrough in the automobile industry. Ben explains: “At this point it’s difficult to say what that killer ap might be for utilities: It won’t necessarily be the best technology or the cheapest price that provides the breakthrough in the market. It will be the one that appeals the most to customers’ rapidly evolving preferences.”
A smart future?
Compared to other sectors, power and utilities companies have traditionally faced the future with a high degree of certainty and confidence. The smart transformation, whether it is evolutionary or revolutionary, means that mindset will have to change forever.
Ben concludes, “Smart offers huge opportunities and rewards for both old and new players in the power and utilities arena but also potential oblivion if companies either move too quickly and bet the house on the wrong strategic approach or are too slow and miss the boat. The next decade will be the most interesting in the sector’s history.”
“Strategic goal of Russian power and utilities sector is not only to meet growing market demand for energy, but also to achieve this in a cost effective manner using modern technologies, ― says Alexey Loza, Partner, Head of ECU at Ernst & Young. ― After years of underinvestment bringing the sector up to the most advanced standards is difficult but not an insurmountable task. The sector began to realize the increasing effect of consumer energy saving on energy companies. To remain in the game, energy companies will have to improve supply chain effectiveness, develop and apply new innovative technologies.”
About Seeing energy differently
One of the greatest changes to affect the Power and Utilities sector in over 100 years is the implementation of smart technologies. Ernst & Young has many years of experience engaging with the challenges and changes that shape industries as they work through transformation. Seeing energy differently combines that experience with our understanding of smart’s impact on the power and utilities sector and its potential to start a revolution that creates new, converged markets. For those looking to navigate the opportunities of smart, we explore the lessons power and utilities companies can learn from other sectors’ transformation experiences, new business opportunities, and what it takes to be a winner in a future smarter world. Read more at www.ey.com/smart.
About Ernst & Young
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