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Smart Grid Business ModelUtility business model is dying fast, claims European consultant
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Dec 4, 2012
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Quick take: I don't envy utility CEOs, who've seen more change in the last five years than in the 50 previous. But just in case they don't have enough to worry about, here is a noted European consultant who warns that the traditional regulated business model is failing... and is doing so faster than anyone realizes.
He thinks we should look to the telecommunications industry for lessons, since they seem to have solved some of the | |
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problems that still face us. If we did that, he says, utilities could start giving away gear as part of a long-term energy contract (the way phone companies give away free cell phones).
I have often wondered why we don't look to telecommunications for possible solutions. Sure, I understand that the two sectors have big differences. Even so, we have similarities too. Can't we learn from their mistakes and lessons? Use the Talk Back form to comment and the Quick Poll to vote. – Jesse Berst
Trust in energy utilities across Europe has reached an all-time low, according to Jonathan Lane, GlobalData’s Head of Consulting for Power and Utilities. He cites the current debate in the UK surrounding its proposed new Energy Bill and related discussions across the continent where he says utilities are charging customers progressively more and often delivering less as intermittent renewables undermine grid stability.
He asks if it isn't time for utilities to switch to a telco-style business model, before it's too late.
“The traditional utility business model is dying and the end may come more quickly than we think,” says Lane. Acknowledging that there are some fixed costs in the traditional model, he argues that the industry's focus on largely variable pricing is in contrast to other sectors such as telecommunications, pay-TV, Internet and water, where both the input costs and consumer prices are largely fixed.
Lane points to development of the mobile telecommunications sector as an example.
“The scale and low cost of mobile handset and smart phone production means that Mobile Network Operators (MNOs) are able to provide devices for free as part of service contracts. This is now happening in energy as solar PV prices collapse as the technology scales.”
The Solar Energy Industries Association reports that PV module prices fell to $4/W in H1 2012 from $8/W in 2009. If electricity prices continue to rise at 10% a year, Lane thinks it will be no time at all before energy utilities are able to offer service contracts with free hardware, in a model already deployed in the telecommunications sector.
“All of these changes are accelerating more quickly than one could have imagined only a year ago and energy utilities need to catch up quick or see their business models collapse around their ears," he says. "Indeed, for many consumers energy utilities would not be the provider of choice for a telco-style service contract with free hardware.”
You might also be interested in…
Electronomics: Why utilities must invent their own future
Why utility CEOs are asking the wrong question (and what they should ask instead)
The coming renaissance in electric power retailing (and what it means for the smart grid)
Jesse Berst is the founder and chief analyst of Smart Grid News.com, the industry's oldest and largest smart grid site. A frequent keynoter at industry events in the U.S. and abroad, he also serves on advisory committees for Pacific Northwest National Laboratory and the Institute for Electric Efficiency. He often provides strategic consulting to large corporations and venture-backed startups. He is a member of the advisory boards of GridGlo and Calico Energy Services.
| Telco bumps and issues |
| If you look at the landline telco model, they still don't give away hardware, only the wireless telcos do. The cost is embedded in the cost of using the network by the customer, so it is not a "give away" but a financing model. The Utility industry has done that in various parts of the world to drive adoption and demand (remember some of the GE campaigns of the 1950s?). We are not going to break the wired monopoly world we live in without a new disruptive technology (freezed dryed batteries anyone?). Until then the fixed cost will be there for the network. As to variable pricing, most Telcos have dropped it in favor of "unlimited" plans, this would be backwards from the goals of reducing emissions. I have a hard time when someone applies the "telco" model to another industry and proclaims that industry is dead unless it follows. We don't have the same disruptive technology advance that Telco did, when it comes, we as an industry better be ready to jump, until then - reliablity, quality, service should be the industry watch words. |
| Doug Houseman - 12/04/2012 - 06:39 |
| Telco comparison |
| The comparison between Energy and mobile comms is invalid for some very fundamental reasons: Input prices (energy prices are volatile not just on a national basis but on an international basis) Mobile comms is not a "must have" have food water and energy and is therefore not regulated as heavily. You cite the Energy bill in the UK. The regulator is pushing tariff simplification which is heading in the OPPOSITE DIRECTION to the mobile comms industry. Banning: Discounted tracker tariffs Annual rewards for non-fixed length tariffs Tiered tariffs Can anyone see this moving to a mobile phone model? |
| Paul Scotson - 12/04/2012 - 07:07 |
| When Price Increases are a Good Thing |
| Today I pay at least 15 times more for telecommunications services each month than I used to pay in 1980 when AT&T ruled the roost. What's more, I don't blink an eye, because I get a lot more value for my buck than I did back then for paying for reliable dial tone for local and long-distance calls. The Judge Green decision unleashed the power of consumer markets on a telecom industry that had historically focused almost exclusively on network operations and system reliability. In that respect, the resemblance with today's electric utility business model is uncanny. Utilities focus on system reliability to deliver a commodity - kWhs - yet eschew high value energy services. As Doug suggests in a previous comment, it is true that disruptive technology is still immature in the electricity industry relative to the telecom industry. But another way to look at it would be that novel business models that increase value foster increased adoption of new consumer technologies, leading to disruption. Electricity utilities lack the sense of urgency and paradigm shift that the Judge Green decision provided to telecom companies. The monopoly breakup may have been a bitter pill for AT&T at the time, but that decision led to an industry transformation over the ensuing decades, and a mushrooming of consumer value. Therein lies a lesson and a question for electric utilities - absent a forced mandate, can they find a way to engineer more customer value than they provide today and in so doing, dramatically increase their revenue opportunity? |
| John Cooper - 12/04/2012 - 11:56 |
| The current business model is acceptable, but.. |
| Does anyone think that telcos would have realized such success the way utilities are trying, by promoting reduced emissions, increased reliability, or lowering the cost of preparing the bill? Or to save pennies with time-of-use tariffs (which, by the way, was tried)? I suspect not. I suspect rather that new applications drove that success, applications above and beyond the fundamentals of reliability, quality, and service. Utilities can benefit by completing the communications pipe and reap their own (uninteresting-to-consumer) fundamental benefits. Then they can let other companies leverage their infrastructure with exciting applications and devices, possibly even by giving them away. A utility can probably install that pipe without an overhaul of their business model, but they do need to better enable others to innovate on it, universally, across any one utility’s domain. IPv6 is key. |
| Mark Serpa - 12/04/2012 - 13:17 |
| I want my lights to go on and off all the time |
| Just what I want - Electricity that goes off every time I use it. People that continue to attempt to pull very convenient one topic comparisons from telco to electricity are doing a great disservice. First, there is no disruptive technology that would allow the type of change that has happened in telco. We don't have wireless power and there is no competition to deliver electricity. One path to deliver electricity to the home, regardless of how you try to make it 'competitive' today. Second, I drop calls continuously and that is just OK in this model. I doubt people would find that as acceptable in electricity. Yes, change will happen. Yes, we are changing, but using telco as a direct comparitive is just silly and has been proved so many, many times. But I guess we'll keep giving these folks air time just for the sake of the entertainment value. Electricity is too important to the safety, security and way of life of humanity to treat in such a cavalier manner. I love the utilities that keep my lights on with three 9's of reliability. I'll take them with all of the other problems that exist and try to help solve those problems versus abandonding the concept. |
| Chris Hickman - 12/04/2012 - 19:19 |
| What do you mean by Telco? |
| Well, if by telco you mean the mobile market, then it's a lot harder to draw a comparison (as has been pointed out in comments above). However, with lowered production costs and thus barriers to entry for electricity production (regarding some renewable sources anyways), I think the growth of the internet would be more akin to a comparison. We *could* see more and more small ESP (Electricity Service Providers) pop up and compete with the big utilities (much like ISPs did back in the 90s). What do you think? |
| Philippe Lyon, Powerhouse - 12/05/2012 - 04:36 |
| Telco / Electric Utilities - Good Comparison |
| I think there will be a lot of people out there who would be happy to make their own decisions about reliability...that is when we are allowed to make the call ourselves about how much we value the lights staying on rather then relying on a club of arcane regulators to do it for us. We see those themes today in mobile telco business; select a lower quality of service for a lower bill, or the opposite. I can't envision the electric power industry escaping forever the pressure to move in that direction. I agree that it might yet take a long time, but the regulated monopoly is going to be a fat target for companies with the innovation, technology and irreverence to chip away at the dinosaur business model. Look at California, people are beginning to think net metering is an entitlement. Never mind the long winded and valid lecture about cross subsidization, the issue may be already lost on the public, many of whom I suspect relish the possibility that they could turn to solar companies or other emerging energy management upstarts that go in between them and their not-so-trusted incumbent utility. Give the people another decade of this trend and just try to take it away from them...which is what might have to happen to keep the monopoly together. |
| Bill Henry - 12/06/2012 - 12:34 |
| Telcos USE Electricity - They Don't Make It! |
| Chris Hickman is 100% correct about the one thing that always gets overlooked in these kinds of utility-telco comparisons: Specifically, telephones support convenience whereas electricity supports LIFE! There is NO comparison. IMO, diddling around with anything that puts grid safety and reliability at risk in the name of competition is playing with fire. Just look at what happens when we lose it through a disaster like Sandy or Katrina -- people threatening investigations (witch hunts!) and class action suits to prosecute and persecute the very people who have the best incentive there is to keep the lights on... it's the ONLY product they sell, and their profit is tightly regulated! What better incentive could they possibly have? (Contrary to popular belief, competition isn't necessarily good for everything!) |
| M.A. Marullo - 12/09/2012 - 20:48 |
| From monopoly breakup to business model innovations |
| Another comparison of the electric power industry is better understood with railroads. Think of the emergence of cars, trucks and planes as transportation alternatives to railroads. Think again with the parallel of central generation versus distributed generation. Now think of the power industry as two grand businesses that mutually reinforce each other: a regulated transmission and distribution business and an open market wholesale and retail business. Under this new arrangement, contrary to what the European expert suggest, we should not be looking for Telco's like business models. In fact, the deregulation problem the industry faced in 2000, in California, came from a short term Telco style energy deregulation, when the power industry has important long term capacity implications. To see what has been emerging since the 1980s, please take a look at the post "Competitive electric retail revolution ( http://bit.ly/GMH764 )," which was set up two days ago as a discussion in this group. It starts with “There were two major limitations to competitive electric retail markets, one was conceptual, the other political. We didn’t really understand electric retail markets. As a result, after the California debacle, new retail...” As you will see, such revolution structures the (wholesale and) retail market for a business model competition under a customer orientation, not a regulator orientation. |
| José Antonio Vanderhorst-Silverio, Ph.D. - 12/13/2012 - 11:01 |
| set up two days ago as a discussion in this group... |
| Refers to a Linkedin group... sorry! |
| José Antonio Vanderhorst-Silverio, Ph.D. - 12/13/2012 - 11:04 |
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