November 27, 2018

How to succeed in transforming from utility company to energy service provider

Timo Karpola

Head of New Energy Services, ICS, Tieto

The utility industry is grappling with ways of staying relevant – and indeed, staying in business – in the rapidly changing energy market. There is a strong drive for transformation from a retailer to an energy service provider. But how to do that? Timo Karpola, Tieto’s Head of New Energy Services, outlines some paths to success and helps you explore where to find the value.

Energy companies have seen that selling electricity contracts alone won’t cut it in future market conditions. The problem in transforming from a commodity seller to a service provider, though, is that energy companies traditionally are not used to creating and marketing new services, and are unsure where to start – what is the “killer app”.

True, different markets have slightly different regulatory frameworks, but overall, energy services are a hot topic everywhere.

To succeed in the transformation, two conditions must be met. The services must be something the end users want, and they must be realisable in a profitable way. It is inevitable in the process that the energy company will need to cannibalise some of its present business. Distributed energy resources, combined with real-time data, provide an answer.

Value for the end user

The end users are interested in two things: a lower energy bill and how to make their lives easier. With smart consumption control, aided by distributed energy resources, both goals are achievable at the same time.

Distribution companies are moving towards power-based tariffs. For the consumer, consumption control can bring significant savings through avoiding consumption at peak times. Switching off some devices while other ones are being used, such as slowing down the charging of an electric vehicle while the oven is in use, is a simple but efficient solution.

Home energy storage has not yet reached critical mass, but battery prices are in constant decline, pointing towards increasing popularity. Consumer applications have so far focused on the storage of energy generated by, for example, solar panels. In addition, batteries can be used to flatten consumption peaks: charge the battery during low-price hours and transfer the charge to an electric vehicle during more expensive hours.

Consumers are interested in following their consumption, from a sustainability point of view, but perhaps even more so from a cost angle. With suitable control infrastructure installed, it is easy for them to monitor consumption and change their consumption patterns – “how much did I save this month thanks to the system”.

Speaking of the cost angle, end users can save even from services outside energy. Water leakage sensors or security systems connected to their energy infrastructure, for example, may bring additional benefits in the form of lower insurance costs.

Value for the service provider

For the energy service provider, value flows from four components: increase of wallet share from the services, demand response, ancillary markets, and energy trading optimisation.

Here it must be noted that the service mix will differ between providers. There is no one-size-for-all solution – the business case must be built on every company’s specific, existing strengths.

Demand response, although leading to less electricity being sold to end users, will allow new revenue from services. Smart home solutions, solar panels, heat pumps and electric vehicle charging stations are already being sold, but the biggest wins can be realised by offering a package of services, the infrastructure for which can be installed simultaneously, bringing the installation cost down to a sensible level.

Generation and distribution companies stand to win by being able to shave consumption peaks. Investment in the network can be limited due to limiting peak power by smart means, and peak power plants, mostly using expensive fossil fuel, are not needed or need not be started. More sustainable power generation comes as a bonus.

Energy service providers can get a strong foothold in their customer base if they own the service infrastructure. Always-optimal living or working conditions, indoor air quality control, humidity control and other sensor-based solutions bring added value to the end user while allowing the energy company to optimise its cost-to-serve.

Trading optimisation is another opportunity to optimise revenue and cost. Of course, this cannot be achieved with a hundred or a thousand end users, but if you have a significant controllable load, optimising it will make the normal trading process more accurate and profitable. Estimated profiles are always inaccurate, and the increasing use of renewable energy sources make them even more inaccurate. If you can control consumption, matching supply and demand avoids expensive intraday trading, realising the targeted margins.

Ancillary markets can generate large new revenue flows with low marginal cost. With the need for more real-time matching of generation and demand, an energy service provider can participate in the market with its customers’ load.

Softer factors also come into play. When an energy service provider offers an attractive package, customer experience improves, churn can be reduced, and customer contacts take a more positive note. The infrastructure in place allows selling services from ecosystem partners outside the energy industry, such as security or healthcare-related monitoring. Customer loyalty is strengthened by all the positives: lower bills, consumption monitoring, easier and more comfortable living or working conditions.

Millions for the taking

To sum up, the most easily monetisable value comes from optimised trading, ancillary markets and, to an extent, from customer billing.

A somewhat theoretical example, based on 100,000 customers, might look like this:

-  Customer billing – 12 million euro per year (service fee €10 per customer per month)
-  Trading optimisation – 15–20% profitability increase for electricity retail
-  Ancillary market participation – 10 million euro per year

If you increase your revenue by 20–30 million a year, it is bound to have a positive effect on your bottom line.

Choose your partner wisely

To realise all the benefits of distributed energy resources in transforming into an energy service provider, you need a partner who knows the industry and can offer a platform that enables all the service components.

Tieto can provide energy consultation, complemented by strong capabilities in customer experience management, service design and decades-long work with all types of players in the energy industry.

Plus, of course, all systems for energy services out of the box.

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Tieto conducted an energy market research among 80 energy retail and distribution company decision makers in the Nordics. Download the report

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