13 Nov Optimize to Thrive
By: Mark Coyle
It is now approaching thirty years since deregulation by global governments started to introduce competition to their energy industries, with customers of all sizes able to choose their provider. With three decades of experience, a number of distinct phases have been experienced by each market. Competitive energy providers are now studying each others’ markets to identify trends, opportunities and learnings that support their growth.
First there is the initial opening with small volumes and lots of manual effort as companies learn from each other. Over time confidence grows and an accelerated phase of customer selection emerges that opens opportunities for new independent providers to enter the market and take share from the incumbents. Governments often start to intervene to further stimulate competition and keep the momentum going. A renewal stage is created through regulatory interventions to remove competitive barriers or distortions. Additionally, governments may adopt or encourage new technologies that transform the experience of consumers such as smart meters. Eventually a market reaches a plateau level of competition appropriate for their size of market and then inevitably with maturity comes some consolidation. Throughout all these phases the forward looking companies are seeking new propositions to enrich the customer experience and/or new markets to expand into. Expansion enables learnings on a global basis and some economies of scale. Along the way some industry changes or technologies may not realize their full potential and governments will then seek to revitalize them with new programs that create better outcomes for customers.
One thing is clear in all markets, governments and their regulators are focused on the experience of the end customer rather than
the sector or infrastructure. Of course there needs to be a balance, but it is the consumers rather than power stations that vote them in and out of office. This means that the energy provider usually known as a Supplier or Retailer has to look out for themselves. In the early stages of their market participation the entry process, cost recovery and systems access are the key focus areas. This evolves with the market to focus on price competitiveness, service quality and ability to support scale. As customer success is achieved, differentiation and automation become vital to the business. At a certain point the customer growth starts to create a new and pressing need, to optimize the business itself.
A large customer volume of varying types creates complexity in forecasting, the accuracy of which determines the level of forward hedging and near delivery trimming needed to reduce imbalance. The ability to underpin the business with the right finance in operational cash flow, trading collateral, customer acquisition and to meet government obligations becomes an all-consuming focus of the business leadership. So accuracy in the trading, reducing imbalance cost outflows, ensuring metering accuracy feeds through to correct undisputed bills are all part of the virtuous circle of performance an energy provider requires.
Customer growth at any cost will drain cash and reduce return on investment, so optimizing both the market position and the customer portfolio in harmony is becoming the next frontier of competitive energy providers globally. Creating an enduring professionalized culture that can grow customer volumes, access and interpret data to drive position optimization and resource allocation are now integral underpinning to help retailers thrive in the long term.
It used to be said that independent Suppliers with no generation were at a structural disadvantage to the larger incumbent players. However energy markets are now seeing customer take-up of digital technologies such as smart meters control devices in the first wave and smart energy and home control applications in the next. Early adopters also have solar generation on their roof, heat pumps and some have access to community generation projects. As generation becomes smaller, more distributed and connected digitally, each consumer will become their own combination of generation and demand. Suppliers who can access and integrate these in-premise assets to save the customer money overall will suddenly find they have a generation output for the first time. Digital connectivity will drive ever faster, dynamic markets that settle more quickly and at a greater level of granularity. If they can extend the emerging optimization of their businesses at a financial and customer level into the trading, balancing and settlement areas, they will create a new era of integrated provider once more.
At that stage reputational risk of poor service, being perceived by their community to do the wrong thing or security breaches can undo all the technology optimization causing a loss of customers and a sub-optimal business position. Moving beyond a continuously customer switch based market into one of retention and enduring beneficial value means that attention on customer perception must be constant, responses quicker and corrective actions definitive in resolving issues.
Energy is evolving towards a new ‘survival of the fittest’ model, where those who can deploy finance, expertise, focus, systems and data insight to drive the optimal position of the business constantly will win. Those who cannot will find themselves out-competed as the markets speed up and agile decisions about aggregations of small volumes out maneuver their larger, more inflexible assets in their competitors.
The best in the business are engaging to help forward thinking competitive energy providers move quickly to create the next phase of energy. Customer excellence, connected smart technologies, practical data insight, continual position optimization, best use of capital and an agile decision making culture now combine to once again split the pack. Bringing together global talent and global reach enables the next wave of competitive energy leadership. If today’s model is about customer competition and scale efficiencies, the next is about continually optimizing and agile decision making.
Mark Coyle is Chief Strategy Officer, Utiligroup, An ESG Company