Around the globe the discussion about the future of utilities has intensified. In our last post we focused on the US perspective on the future business models for utilities. With today’s post, we fill you in on the European/German debate about this issue.
In Germany, the future of utilities has been of particular interest since 2016. Then, E.on and RWE separated their core business units into two different companies and it became inherent that utilities have to change their business strategy to survive in a future distributed energy system. However, this change of strategies has been triggered much earlier by many different developments, most prominently, the increasing share of renewables, increasing competition and digitalization. Now, digitization offers the potential to develop new business models beyond the traditional generation, selling and transportation business of energy utilities.
Innogy and the reshaped E.on business try to develop a new service portfolio. We have already looked into why RWE and E.on split up their core businesses in this post. Let’s sum up what the new formed companies Innogy and E.on look like now.
As we can see in the fugues above, both “new” companies are based on a combination of the regulated network ownership, investment in renewable generation and consumer-centric retail business.
The two strategies are quite similar, both focusing on the end consumer market and renewables with the networks as a back-bone for their business. Now, what do the two strategies of Innogy and E.on tell us about the future of the utility business in general? In the following we will present to you different business models that have been introduced by PWC (2014). We will try to show how the current strategies of E.on and Innogy fit into this framework.
Let us first take a brief look at the different business models introduced by PWC (2014).
From asset-based to service-based business models – where lies the future for utilities?
In their report, PWC (2014) introduce 8 business models for utilities in the future (some represent the current business case of utilities in different regions of the world). These models differ in many respects from each other. On a general level, the models can be differentiated by their degree of vertical integration (retail-generation-networks in one company vs. separated companies for each step of the supply chain) and whether they focus on assets or services. Figure 3 provides an overview of the different models.
The business models on the far left of figure 3 represent the existing business models that we can find in different markets worldwide. The Gentailer and the Pure Play Merchant model represent market-based business models where a utility focuses on generation and sells its electricity on a national market (Pure Play Merchant) or owns (in addition to generation) a retail business that directly sells the generated electricity to the consumers (Gentailer). Gentailers are common in all those markets that have introduced competition in the generation and retail sector, e.g. Germany and UK.
In contrast to these market-based models, several regulated business models already exists today. PWC focuses its analysis on the Grid Developer, which is a network owner that operates transmission and/or distribution grids, and the Network Manager model, which describes a utility that solely focuses on network operation without network ownership. Both models are quite common today, with the Grid Developer having been established for example in the Netherlands and Belgium, where the network operators are ownership unbundled by law (Netherlands) or voluntarily (Belgium). The Network Manager model, on the other hand, is common in the US on the transmission level (ISOs) as well as in the UK (National Grid).
These four models describe today’s business models in different markets around the globe. Though these more traditional business models will remain important in the future (especially the network-related ones), we want to focus our analysis on the four models on the right of figure 3 as they represent the more service-based business models.
The Product Innovator model describes a utility that expands its products from selling kWh towards behind-the-meter provision. Therefore, this model comes close to the Energy Service Utility that we introduced in our last post. Basically, the idea of both concepts is that the utility gradually shifts its focus from increasing quantity in electricity sells (which will be difficult in the future due to energy efficiency, self-generation etc.) towards a more consumer-centric service provider. Services could include light per hour, heating per hour or could focus on digital products like energy efficiency apps and appliances. Some utilities are already evolving into this direction, especially in the context of demand-response or smart home applications in the US (e.g. Nest, OhmPower, OPower etc.).
Partner of Partners
With the Partner of Partners Model, PWC (2014) describes an approach for utilities that is based on partnership agreements. Basically, the idea is that a utility in this model provides not only access to its own services and products, but provides their customers with additional products that go beyond their own portfolio. From our perspective, this becomes especially interesting for products that increase consumer flexibility and allow them to actively participate in DR or other flexibility products. This is also true in a scenario with regional flexibility markets (as we have discussed here and here), where a Partner Of Partner model might increase the liquidity within a specific region of a network operator/integrated utility. Already today, some utilities, e.g. in the US or Germany, have picked up this approach (e.g. EWE offers partner products for battery storage or smart home appliances).
The Value-Added Enabler model by PWC (2014) basically extends the existing expertise of the utilities on energy management, forecasting etc. to the customers home/premises. As it is, utilities are managing the energy system of industrial consumers and are handling consumer data in various ways. With digitalization and decentralization, the potential to manage energy consumption on the private household-level will increase, while the households themselves are not keen on managing their energy consumption themselves. Here is where the Value-Added Enabler comes into play: The utility in this model offers an energy management service that manages the energy consumption according to the consumers’ preferences and exploits the existing flexibility of the household to reduce the households energy costs . Several third parties have already become active in the Value-Added Enabler for private households, e.g. the diverse number of demand-response providers (nest, OhmPower, Tesla etc.). Still, utilities could try to exploit this business field as well. Especially for distributed systems with high shares of renewables and a high degree of digitalization this model offers interesting opportunities.
This is the last model discussed in PWC (2014) and it has a strong focus on service-based products in a highly competitive environment. The Virtual Utility Model can be understood as an intermediary and aggregator between distributed resources, markets and consumers. Aggregators are becoming increasingly important for distributed energy systems, e.g. as they provide ancillary services to the network operators etc. The Virtual Utility provides such aggregation services itself or makes use of partner agreements to extend its product portfolio in the same way as does the Partner of Partner Utility described above. The term “Virtual” indicates that this model can become very relevant with the ongoing digitalization. Especially the more recent developments in the context of peer-to-peer trading and distributed ledger technology (see our post on the blockchain in the energy sector here), this model seems to be very interesting.
E.on and Innogy on their way to become “Product Innovators”?
If we take a look at the structure and focus of both, E.on and Innogy, it seems that their strategies are quite well described by the Product Innovator model. Both companies focus their efforts on the consumer and search for new products. Still, their core business is asset-based, with renewable generation and network assets being large parts of their portfolio. So in this respect, they qualify as “Product Innovators” .
However, with their innovation programs, both utilities expand their perspective and investigate different products and services. For example, E.on and Innogy both have their startup accelerator programs to investigate potential new business models based on data from smart metering. Also they look into a potential application of the blockchain technology. If both companies proceed to extend their strategies in this digital direction, it might also be the Value-Adder Model that provides a solution for the future of their businesses: The utilities could combine their asset-base with new consumer-centric services that go beyond the meter. Especially the market beyond the meter will probably become more important for the utilities in Germany as generators are increasingly moving from the central transmission level towards the decentral behind-the-meter world. It is quite significant in which directions both utilities develop, as the current changes in Germany might (in addition to the interesting developments in New York) become blueprints for other utilities around the globe that will soon be facing decentralization and digitalization.