Last updated: Utility companies risk extinction if they fail to embrace business-model innovation

Utility companies risk extinction if they fail to embrace business-model innovation


The Honda Smart Home demonstrates the functionality of a supremely energy efficient home. Its use of solar power, heat balance, innovative water usage, and lighting techniques means the Honda Smart Home actually generates a power surplus. While a house of comparable size consumes 13.3 MWh of electricity per year, the Smart Home is expected to generate an annual surplus of 2.6 MWh, which its owners can sell back to the grid.

Ovo Energy, a British energy retailer, is seeking to create 500 new, essentially nonprofit, power providers by 2020. Ovo will combine local generation and grid-sourced energy, seeking to pass the savings on to consumers. It is one of many power companies in Europe that are using new techniques to distribute energy that is innovative in its sourcing and affordable, and also meets changing customer demand.

In response to initiatives towards smart energy usage, First Energy, owner of power plants and transmission lines throughout the U.S. Northeast and Midwest, is actively seeking to block change. With its century-old profit generation model under attack, First Energy is demanding a $3 billion bailout that comes with many of its own strings attached.

These three examples clearly demonstrate the fast-changing world of utilities. Everything about the industry is transforming. This is forcing every organization to reconsider how business is done, the different pieces they need to have in place, with whom they must collaborate, and how they can best understand the customer. Some get it, and some do not.

The Honda Smart Home US example demonstrates that the technologies, materials and techniques for better energy usage already exist. It is only a few short steps from prototype to mass consumption, as Henry Ford demonstrated so long ago. The Ovo example shows that some utilities have already seized upon the opportunity to transform to meet changing demands. The First Energy example shows, however, that old management habits and revenue models tend to die hard, especially for utilities long used to controlling all aspects of the market.

Todays era is one in which all organizations, including utilities, must re-evaluate their products, their delivery methods and their understanding of individual customersa concept we call business model innovation.

One of the key reasons for urgency is the fact that the market is not static. Through deregulation and technological innovation, it continues to open up to new, non-traditional players. As tough as it may be for a monopoly, a duopoly or a cartel to protect its turf, this new era of business is allowing niche suppliers with innovative and personalized products and services to move in. The long-standing dominant utilities may still appear as the big fish, but smaller, more agile businesses are making their mark, and in many cases are not in need of the existing infrastructure to do so.

Utilities now face a situation similar to what the music industry faced two decades ago, and they stand to be left behind in a similar fashion. The message to the old guard is: Evolve. Transform. And be quick about it. The new business model is about building direct relationships with customers; understanding what they are looking for and seeing how the utilities can provide it.

The advantage utilities have is that they still own (or control) much of the infrastructure; but innovation now requires multi-sided business models. This means doing business through or with other partners, sharing risks and revenues in the same way Apple does with the app marketplace: they take a percentage; the app developers take a percentage. There is a business model agreement between them. That is how many industries now work, and this concept is now shifting to the utilities space.

One simple example, which demonstrates how the utilities space mold has been broken, is the empowered consumer. Customers are now free to install solar panels on their roofs to reduce their dependence on the power company. They can even sell surplus generated power back to the grid.

Utilities must use 360-degree visibility into their customers, and their customers products and orders. They should manage internal and external data, both structured and unstructured from a single source of truth. They need to re-platform the core business processes, and bring together business process and analytics in real time to be smarter, faster, and simpler.

Utility companies must understand what they actually do in todays markets, how they can evolve, and how they can continue to provide value. They also need to decide how they can be a partner for consumers, while still monetizing the relationship. It is about transforming. Ideally, it is also about leading, rather than responding, because that is where the business is. The differentiators will be the companies who will lead through this next evolution in the utilities space.

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