How power utilities can capitalize on emerging market opportunities
The electric power and utilities sector faces a complex challenge: managing a revenue downturn while meeting the demands of its technology-conscious consumers. It is finding itself pulled to economize and pushed to innovate – two goals that might seem to conflict. How should power and utilities companies work at creating a harmony between these two goals?
Meeting the demand gap
Because of the changes in customer demand, being a leading innovator is a much more compelling strategy than it used to be in the power and utilities sector. Digital technologies are evolving, and customers are quick to adopt them. Both business and consumer energy users are clear about their expectations. They want to reduce their consumption, and they know that technological controls and data analytics can help them do it. The challenge faced by power and utilities companies is to close the demand gap and provide value for customers profitably. By doing so, these companies can expect a future of growth and customer loyalty. If these efforts fail, organizations may risk being eclipsed by upstart competitors, because the window of opportunity to do so before rivals from other industries build their capacity and credibility with customers is limited.
Blueprint for a service-based model
Much of this change will start in the business-to-business domain. As enterprise customers focus on reducing their energy consumption and expanding their mix of options, they are creating new opportunities for power utilities. Energy management is a new competency for many of these businesses, and it requires sophisticated help — the type of help an electric power or oil and gas utility can provide. Therefore, with an eye on future value, customers are proactively turning to utilities and contracting with them for sophisticated energy management services. To capitalize on this emerging market opportunity, utilities need to move beyond the old commodity-based model in which the primary goals were cost-effective supply acquisition, modernization of industrial process equipment, and total bill reduction. Cost management and basic service will still be important, but they will no longer be central. Power utilities will now need to provide alternative generation sources, energy storage, equipment replacement, sensor-based energy monitoring systems, software-based data analytics, facilities management services, and the infrastructure to back it all up. On this basis, they will expand their customer relationships.
Redefining your portfolio
Utilities are used to providing knowledge and services through a single model: the regulated business. And this tradition may not need to change. Many electric power companies can simply expand out from their regulated business model, increasing their portfolio of offerings to include some that are regulated and some not. But even utilities that operate almost entirely in regulated businesses will have to embrace a new, digitally enabled portfolio of offerings. This is the simplest and most direct path to a service capability that will have increasingly high value in the marketplace. Whether through M&A, partnerships, or both, choosing energy services management as a growth path means evolving from a basic regulated-utility model to one with more flexibility in market participation, offerings of products and services, risk taking, and other factors. This would include more adjustable pricing approaches such as fees-for-service, shared performance gains, and value-based margins. Following an inorganic approach also means shifting from a business model of owning assets and driving return on capital to a model that focuses on product and service volumes that create margins.
Learn more about the new environment that power and utilities organizations face going forward. Read Strategy&’s 2017 Power and Utilities Trends and prepare for your company’s future!