BUSINESS MODEL TRANSITION

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BUSINESS MODEL TRANSITION

Adapt and Thrive

How will the uptake of EVs and the proliferation of home services impact on utilities and what other new services are in the pipeline as energy and water firms look to diversify and capitalise on the changing landscape? For our fourth report in the build up to Utility Week Live, Nadine Buddoo looks at the changing business model.

With competition increasing and the market share of the Big Six slipping, energy firms are being forced to respond to an increasingly challenging market. The emergence of new technologies, evolving customer demand and the need to drive financial performance has wide-ranging implications for energy and water companies alike. Utilities are increasingly compelled to examine their business models and determine how they will prepare for future challenges amid present uncertainties.

In a recent survey conducted by Insight Advantage for Utility Week Live UWL, competitive pressures and changing consumers habits are likely to have the biggest impact on the transition of utilities. Rated on a scale of 1 to 10, respondents believe competitive pressures will increase from 6.4 currently to 7.0 in five years. Similarly, the evolving role of the consumer will shift from 6.1 currently to 7.4 by 2024. Other major areas likely to impact utilities include changing policy and regulation (6.1 to 7.2), sustainability considerations (5.7 to 7.1) and Big Data (5.6 to 7.1).

And it is clear that most businesses anticipate the effect of these trends to intensify over the next five years. On average, the impact of industry trends is expected to be 23% higher by 2024, according to the survey.

Both energy and water companies are grappling with environmental, security and affordability requirements at a time when the political landscape remains uncertain and the long-term impact on business is unclear.

In the energy sector, the UK’s controversial nuclear power strategy is fraught with obstacles. Following a series of blows to the government’s commitment to a new generation of reactors, Hinkley Point C remains the only project currently under construction. Unsurprisingly, this has raised concerns about how the UK’s long-term baseload will be provided.

For the water sector, the future is no less challenging. Just last month (19 March), the Environment Agency’s chief executive, Sir James Bevan, delivered a rallying speech at the annual Waterwise conference in which he warned chronic water shortages could plunge England into the “jaws of death”.

Adding to the complexity of industry trends impacting utilities, organisational stability is a significant challenge faced by both energy and water companies. “In the energy market, conventional business models are increasingly being challenged by agile businesses adept at navigating the new energy landscape,” says Ted Hopcroft, energy and utilities expert, PA Consulting. “For water companies, the background threat of re-nationalisation, aligned with what looks to be a tough price control, is causing companies to review their business fundamentals.”

According to Hopcroft, both water and energy companies are seeing regulators tackling the cost of capital with a renewed vigour. There is a clear determination not to repeat the post-financial crash scenario where perpetual low interest rates provided great opportunities for asset businesses.

A Word from our platinum sponsor

Margin pressures and carbon targets make it tough for utility providers to make a profit. Which is why many are broadening their service offer. Technology can facilitate this shift, but it’s the people who will make it a success.

Build a broader portfolio around your people

Utilities firms are under strain to innovate and transform. Decarbonisation agreements are pushing renewables up the energy chain. There’s higher public demand for eco-friendly tariffs and smart management options. Market decentralisation and disruption is driving increased competition.

No wonder firms are looking to diversify and expand their product portfolio. Many now offer home services, equipment repairs, emergency callouts, security and insurance. While some are working with electric vehicle manufacturers to establish a new infrastructure of public charging points.

Diversification starts with people

Technology plays a crucial role in making these diversification projects work. However, it should not be the starting point. Any transition to a new business model has to start with the people who will deliver it.

For the utilities industry, with its high attrition rate, this is especially important. Businesses need to get people on board early, design technology around their needs, and give them the experience and skills they need to serve customers effectively. It’s the only way to encourage engagement, build satisfaction, and drive a successful transition.

A greater understanding of how people on the ground really work will ensure that, in a customer’s moment of need, staff are empowered to deliver standout, differentiated experiences. When technology is designed around their needs, they can respond quickly to emerging opportunities rather than battle with cumbersome processes.

Learn first, transition next

At O2, we work closely with utilities providers to help their transition to new business models.

While rolling out 53 million Smart Meters across the UK, we helped energy providers adapt to the need for fewer on-site visits and new ways of managing debt with customers. The starting point was understanding precisely how those employee-customer interactions take place.

Similarly, our integrated partnership with NWG was built on spending time with engineers in the field. This helped us develop a bespoke IoT solution to predict leaks and equip engineers with tools to complete more work on the move. By listening and learning first, we’re supporting NWG’s digital transition to become a world-leading water company.

Are you transitioning to a new business model of your own? Talk to us at our Challenge Wall at Utility Week Live – we’ll be at stand F56.

The three Ds

For energy supplier Centrica, there are three major trends that are transforming the way the company does business and the way it serves customers: decarbonisation, decentralisation and digitalisation. Alongside the shift towards renewables and flexible energy sources, there is a simultaneous movement away from power being produced in large centralised power stations. “This is a hugely positive development but one that is creating fresh challenges for energy networks,” says Sam Salisbury, labs director, Centrica Innovations.

The impact of these market changes has been amplified by the emergence of new technologies that are fundamentally altering the traditional energy landscape. “The arrival of electric vehicles, coupled with advances in connectivity, battery storage, solar and other renewables that allow homes and businesses to produce and store their own energy, is creating new opportunities for us to engage with customers,” explains Salisbury.

This major change in the way businesses engage with customers is also being facilitated through increased collaboration between different utilities, particularly between energy and water. Louise Manfredi, managing director at multi-utility operator Leep Utilities, has closely monitored the success of the data sharing trial between United Utilities (UU) and Electricity North West (ENW).

The pilot proved that data sharing can remove the onus currently on the customer to register for additional support with multiple companies. It also showed that data sharing helps companies go further to help vulnerable customers.

“The sector is moving towards the industry-wide exchange of data and Priority Services registers for the benefit of customers,” says Manfredi.

“It is encouraging to see that the [UU and ENW] trial has been extended as part of the industry-wide ‘One Priority Services Register by 2020’ initiative. With a continued push to inform consumers about the benefits of the data sharing process as an industry, we will be able to boost consent rates and deliver a national data share for Priority Services across the water and energy sector by 2020.”

Water Outlook

The water sector has historically trailed the energy market in terms of progress, admits Manfredi. However, there is significant ongoing work to reduce this gap. Manfredi believes the standardisation, pushed by Water UK, to streamline adoptions, as well as the Sewers Adoption v8 which lays out the process for adopting sustainable drainage systems (SuDS), are significant drivers for transition across the sector.

Additionally, the launch of the New Appointments and Variation (Nav) scheme heralds an encouraging step-change for water utilities. “Leep has seen positive changes as a result of Ofwat’s work in the Nav market, resulting in insets becoming a more commercially viable proposition,” she explains.

Leep has witnessed growth in both the independent distribution network operator (IDNO) and water markets in recent years, with it becoming increasingly important for the company to set itself apart from competitors. “We provide a flexible and straightforward service and are willing to work with ICPs or developers directly. Leep is committed to providing transparency for the asset payments, which will be paid in return for the adoption of the networks,” says Manfredi.

“Diversification is key to the business’ ongoing success; we believe there is a requirement to provide a full multi-adoption offering to developers. Similarly, with changes in the Nav market making insets more viable, we have expanded in this sector with the acquisition of SSE Water.”

The addition of SSE Water to Leep’s portfolio means it can provide a multi-utility offering, which is particularly attractive for the landscape housing market – a sector in which the company is keen to expand.

“As part of the acquisition we have been able to leverage the knowledge, experience and expertise of the team, which has been most welcome as we settle into our new role as the largest operator in the UK Nav sector,” adds Manfredi.

The company prides itself on a flexible business model and a commitment to delivering “straightforward connections” for clients. The challenges of embracing new technologies, meeting ambitious sustainability targets, improving efficiencies and lowering costs for consumers will certainly require utilities across the UK to embed flexibility at the very core of their business and the solutions they deliver for customers.

Breaking Barriers

Water and energy companies now have an opportunity to look beyond traditional barriers and learn from the example of leaders in sectors like retail, telecommunications and financial services. “There are new ways to architect systems to drive greater flexibility and lower cost.” insists Siddall at Accenture.

“With the added power of technologies like cloud services, customer analytics, automation and artificial intelligence, there is also greater opportunity to personalise and automate customer interaction across the right channel, at the right time and for the right outcome, dramatically lowering cost with higher customer satisfaction.”

To do this, says Siddall, requires a new outlook from utility and energy companies with respect to the core capabilities they need to focus on. Businesses must also partner more effectively to get the best out of a broader ecosystem that will keep them at the frontier of innovation and cost.

Centrica is welcoming this challenge through its Centrica Innovations (CI) venture, which has seen the company collaborating and investing in start-ups that could have a significant role to play in the future solutions offered to customers. Since CI’s launch, the company has invested in Israeli firm Driivz and is collaborating on electric vehicle (EV) charging solutions for businesses as part of Centrica’s new Mobility Ventures team.

The team will build on Centrica’s experience as an installer of over 17,000 EV chargers globally and the launch of a new smart time-of-use tariff from British Gas that offers homeowners cheaper electricity overnight to charge their car.

Centrica has also invested in GreenCom Networks as part of a new Home Energy Management Ventures team, which will see the company expand its offer for homes to include solar, battery storage and heat pumps.

“But it’s important to note that our mission extends beyond scanning for technology,” insists Salisbury. “We’re focussing our resources on finding solutions to some huge societal challenges such as the need to decarbonise transport and heat, and how to help older people live more active lives and stay in their homes longer…Fundamentally, it’s all about how we can better serve our customers.”

Improving the way that customers are served now and into the future must remain at the heart of every business. But according to the UWL survey, current business models will be 31 per cent less fit for purpose in the next 15 years. It’s a distinct warning for utilities if they fail to embrace the bountiful opportunities for change: act now, or risk being left behind in the proverbial dust.

Centrica's Guiding Principles

As part of the transition facilitated by Centrica Innovations, the company is working to embed three guiding principles within its business units:

PURPOSE

Working on big and meaningful problems leads to sustained value creation. Profit and purpose live together, not separately. This enhances the focus on the customer.

TEST AND LEARN

Spend less time planning and analysing and more time doing and evaluating. Move faster, with more conviction in a less certain environment.

DO IT WITH PARTNERS

Partners can accelerate the pace of innovation. “We don’t have to do it all ourselves,” says Salisbury.

LEEP UTILITIES IN FOCUS

LEEP UTILITIES IN FOCUS

Multi-utility operator Leep Utilities is a joint-venture between Ancala Partners, a mid-market infrastructure investment manager, and the Peel Group, a private real estate investment and infrastructure firm.

As an IDNO, Leep says it can offer a flexible and commercially advantageous alternative to the incumbent distribution network operators (DNOs) in the adoption of electricity networks on new and existing developments. Under its regulatory licence, the company can adopt electricity networks that have been constructed by National Electricity Registration Scheme-accredited independent connection providers (ICPs) in return for a financial contribution. This cannot be offered by an incumbent DNO.

Leep’s adopted network portfolio includes MediaCityUK, the technology and media hub home to the BBC and ITV in Manchester; Princes Dock, a vibrant neighbourhood and integral part of the Liverpool Waterfront; and Canary Wharf Group’s Wood Wharf district, a new mixed-use waterside community comprising more than 3,300 homes and alongside shops, restaurants and community facilities.

REACTIONARIES, REFORMERS AND REVOLUTIONARIES

REACTIONARIES, REFORMERS AND REVOLUTIONARIES

Utilities are displaying some interesting divergence in response to competitive pressures. According to Laura Sandys, CEO of consultancy Challenging Ideas, businesses can be broadly defined as either “reactionaries”, “reformers” or “revolutionaries”.

Sandys describes reactionaries as firms that have dug their heels in, maintaining a “my way or the highway” attitude when it comes to the prospect of business transition. “They will no doubt find that their margins, their customer base and their ability to compete into the future will be diminished,” she warns.

Reformers are utilities that are working to change their business models from the traditional supplier model to a more modern approach to delivering customer benefits. “The challenge for these ‘reformers’ is that tradition might still be in their DNA and that the ‘revolutionaries’ are moving too quick to enable these reformers the time to re-shape their business models,” explains Sandys.

The significant advantage that revolutionaries have is a new vision, without the restraint of incumbent thinking or systems, having designed their business models with a fresh approach based around technology. Sandys adds: “These companies have marketing advantage, systems advantage, technology driven and while some smaller players might not survive, the leaders in this group will shape the energy company of the future.”

What should Utilities focus on as the industry transitions?

Ted Hopcroft, energy and utilities expert, PA Consulting

“For both energy and water businesses, the three most important areas are: strategy, strategy and strategy."

“In energy, companies have to develop strategies to manage both global and local disruption…In water, companies must decide where they want to be positioned in the market, define their strategy to achieve that position and enact and drive the change to ensure success.”

Duncan Barnes, partner in Deloitte Digital

“Number one is data: it is no longer a by-product of your main line of business. Now, it is a strategic asset, one that helps companies to understand better their customers and consumption, and even their own operational performance.”

Toby Siddall, a managing director and UKI utilities lead, Accenture

“Businesses must partner more effectively to get the best out of a broader ecosystem that will keep them at the frontier of innovation and cost.”

Trends Driving Transition Across Utilities

  • Competitive pressures
  • Changing consumer expectations / habits
  • Changing policy & regulatory framework
  • Sustainability considerations
  • Big data
  • Smart meters
  • Electric vehicles
  • M&A activity
  • Climate change
  • Digitalisation of energy
  • Internet of Things
  • Change in government
  • Augmented / virtual reality
  • Step change in sustainability
  • Changes in workforce
  • Convergence of services

New Appointments and Variations scheme

Ofwat’s New Appointments and Variations (NAVs) scheme allows limited companies to provide water and/or sewerage services to customers in an area which was previously provided by the incumbent monopoly provider.

A new appointment is made when a limited company is appointed by the regulator to provide water and/or sewerage services for a specific geographic area.

A variation is where an existing appointed company, described as an “appointee”, asks Ofwat to vary its appointment so it can extend the areas it provides services to.  A new appointee has the same duties and responsibilities as the previous statutory water company. A Nav, therefore, involves one company replacing another as the appointee for a specific geographic area.

Ofwat introduced the scheme to promote competition across the water industry, while encouraging efficiency, innovation and lower costs.

Contractors and supply chain transition

To better support transitioning utilities as they tackle the challenges ahead, the wider supply chain is similarly restructuring and diversifying. This shift is illustrated by engineering firm Black & Veatch which recently launched a smart maintenance business to better support its utility clients.

The new offering builds on the company’s technology-led asset management consulting experience to create digitally-enabled onsite maintenance teams. The business will combine established technology-driven maintenance methodologies and smarter instrumentation, control and automation technology. This will be enabled by Black & Veatch’s own data analytics capabilities and visualisation dashboards; and the capabilities of its new artificial intelligence and machine learning strategic partner Emagin.

Development of the smart maintenance business is a further extension of Black & Veatch’s UK utility offering into the infrastructure and capital maintenance sphere. By focusing initially on water but with a view to broadening to other sectors, the new venture also supports a drive for greater diversification across the business.