Mi 3 2011_pg_36


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Our article that is published in Metering International issue 3, september 2011. The article is about smart meters and new business model in the utilities sector.

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Mi 3 2011_pg_36

  1. 1. AMI & SMART METERINGSMART METERS ENABLENEW BUSINESS MODELSIN ELECTRICITY RETAILBy Paul A. Hendriks and Bart LaurenseThe electricity industry is in flux: today few things are as they Change 3: Transactional data enables customer segmentationused to be and for those things that are, changes are on the Most energy supply companies lack insight into customer demandhorizon in the near future. However, there seems to be one and behaviour. The introduction of smart meters provides anexception: the business model for electricity supply to domestic opportunity as energy supply companies can potentially acquirecustomers, which has not changed since the early days of the more detailed information on the consumption of individualindustry. In the article, we will argue that the mandatory rollout customers. Moreover, in some cases the consumption of individualof smart meters in the European Union provides opportunities appliances in the home can be registered too. This data canfor new business models and gives rise to a particular approach be provided to consumers and prompt them to become morethat can be applied in these markets. energy efficient or change consumption patterns. It also enables segmentation of the consumer market and development of proposalsThe traditional business model has its roots in an electricity market for individual segments.dominated by vertically integrated electricity companies. Thesecompanies were large because most sections of the industry were Change 4: Ubiquitous communication enables informationcapital intensive and in line with the typical characteristics of a symmetrynatural monopoly, economies of scale applied. A large proportion of In most consumer markets, the price of electricity is fixed andthe current electricity companies are still associated with companies consumers are not aware that the cost of electricity varies overfrom this previous era. Even though liberalization and restructuring the day. Today, communication technologies can overcome thehas changed the characteristics of companies and enabled new problem by providing price signals to consumers, which canentrants to enter the market, some consumers still associate today’s influence their attitude towards electricity and can change theirelectricity companies with the monopolies of the past. As a result, consumption patterns. The internet and other communicationthe relationship between consumers and energy companies is very tools enable energy companies to disseminate information on thedifferent from those in traditionally competitive markets and this electricity provided but can also provide feedback to consumersis especially true for today’s monopolies – the transmission and with respect to their consumption.distribution network operators. Change 5: Distributed generation transforms consumers toA CHANGING INDUSTRY market participantsThe perception of energy companies as “autocratic” entities, Traditionally the indivisibility of capital combined with economiescombined with the fact that the business models applied in of scale resulted in ever increasing power plants. However,the market resemble the models from the past, is considered a the advent of small scale generation assets that are becomingbarrier for the development of the electricity market into a truly competitive with traditional power plants changes the role ofcompetitive market. Today people expect suppliers to provide domestic consumers. Once these consumers deploy equipmentproducts and services that meet their individual preferences. for generation like photovoltaic systems, small scale CHP or smallHowever, a number of recent developments in the industry wind turbines they become prosumers and their relationships withare starting to allow energy supply companies to change their energy supply companies change.traditional approach and transform into “democratic” entities. These changes enable a transformation from defensive businessChange 1: Contestable market facilitates new entries models utilized in traditional markets to offensive business models.The market for energy supply has made strides towards becoming Each of the changes contributes to the business transformationa contestable market as there are few barriers to entry and exit. In as depicted in the diagram. Although liberalized markets alreadyspite of this, however, it is surprising to see that new entrants are in provide ample opportunities for business transformation, themost cases “price fighters”, while a growing portion of consumers do current business models still display the characteristics of thenot indicate that price is the most important factor in their choice of regulated markets, i.e. a defensive market approach.energy provider. INTERMEDIATE BUSINESS MODELSChange 2: Customer awareness enables product differentiation The changes outlined above provide opportunities to extendElectricity is traditionally traded as a commodity which means existing business models that contribute to the controlled businessthat no qualitative differentiation is used and price is the transformation, including:only characteristic assigned. With a growing concern for the • Remuneration for energy efficiency (selling negawatts);environment, however, the carbon intensity of electricity is rapidly • Energy services (selling end-use like heating and cooling insteadbecoming another important qualitative characteristic. Also a of kilowatts);growing number of consumers care about the social aspects of • Demand response programmes (remunerate behaviouralelectricity provision. Given these characteristics, the opportunity change);to differentiate electricity across three key variables – economical, • Demand side management (remunerate demand reduction);ecological and social – is potentially immense. • Price differentiation (apply time-of-use tariffs).36 METERING INTERNATIONAL ISSUE - 3 | 2011
  2. 2. AMI & SMART METERING Medium term activities The medium term activities primarily focus on changing the consumption patterns in the community. This includes propagating energy efficiency and setting up demand response programmes for the community. In order for these mechanisms to work the community has to be provided with frequent feedback that stimulates the members of the community to improve their performance. Short term activities Finally the operator has to manage the real time balancing of the community. This is handled by providing a day-ahead forecast. The forecast includes the prices for electricity, the carbon intensity and optionally a measure for the self sufficiency of the community. The members of the community are expected to take this informationChanging business models into account with respect to their consumption. In most cases theAlthough most of these extensions were proposed several decades day-ahead forecast will be handled through an automated energyago, their breakthrough in domestic markets, however, has been management system. During the day of execution the operatorbarred by technological and economical shortcomings. As was sends updated versions of the forecast if needed.argued in the previous section most of these shortcomings havedisappeared but very few business models that are currently CONCLUSIONSapplied take full advantage of the opportunities available. The next The viability of this offensive business model is illustrated bysection presents a business model that takes advantage of the the emergence of local energy companies. Customers of thesechanges presented above. companies obviously are not satisfied with the product offerings of incumbent companies. Another symptom that indicates changeOFFENSIVE BUSINESS MODELS in experiencing electricity is the fact that numerous solutions forIt is surprising that the industry goes to great lengths to adapt its energy management are entering the consumer market.existing business model to the disruptive changes we outlinedearlier without considering developing new ones. The changes, The mentioned communities have multiple positive effects onhowever, provide opportunities for new business models within the the electricity industry as a whole. For instance, the effect ofexisting regulatory framework. local generation and energy efficiency provide the possibility to postpone investments in infrastructure (preventing congestion)Although small scale generation assets are becoming competitive and large scale generation assets (preventing investments). Thethey are more cost effective if they are deployed by a community ability and willingness of communities to balance their demandrather than an individual domestic prosumer; for an individual has a positive effect on power quality and security of supply.prosumer it is almost impossible to adjust his or her consumption The inclusion of ecological aspects of electricity will help reduceto individual generation in order to make optimal use of the power emissions. Most of these positive effects are easily translated intothey generate. If, however, a number of prosumers decide to share economic benefits and therefore contribute to the business case.the power generated it becomes easier to adjust consumptionto the generated power. The prosumers thus form a community The implementation of communities, however, requires investmentswhere individual excess power is exchanged with other community too: smart meters for example. Still the investments are muchmembers. The idea is that the exchanges are recorded and settled smaller than investments in transmission and distribution networkswithin the community over a longer period thus reducing the and new generation capacity. An elegant aspect is that most oftypical transactional costs. the costs (except the smart meter) are covered by the market participants that actually benefit, i.e. prosumers or the communityIt is important to note that the prosumers in a community are not operators.“average” electricity consumers as they are “conscious” users ofelectricity. The type of electricity preferred by these prosumers will As a final remark it is important that the communities contributediffer along the axis of economic, ecologic and social characteristics. to a “democratic” energy supply as participants are free to enrollThis means that various communities will have various needs and in a community and in most cases can even chose from differenttherefore provides the opportunity to segment the market and to communities. This is in contrast with most of the schemes proposeddifferentiate the product along the three axes. by the industry where the industry determines the implementation and offers little choice to the consumers. MIFor typical communities the ecological aspect of electricity istranslated in electricity from renewable sources (solar and wind) ABOUT THE AUTHORS:and the social aspects will be translated to electricity that is locally Paul A. Hendriks has been working as an architect and consultant for the utilities industry for almost 15 years. Most prominent has beengenerated promoting self sufficiency. For an electricity supply his involvement with smart grids for the last 5 years. His current rolecompany these tendencies lead to a situation where it can sell at Capgemini involves smart grids but also smart meters as the next major steps forward for the utilities industry.very little energy as most of it is produced within the community.A business model that is based on volumes sold is therefore not Over several years, Bart Laurense has worked at Capgemini with a focus on the utilities and telecommunication industry. He has degreesvery likely. An appealing business model is based on managing the in economics and strategic management and was recently involved inenergy balance within the community. This business model can be multiple projects as a business analyst and strategy consultant.executed by the community operator or aggregator. The activities paul.a.hendriks@capgemini.com / bart.laurense@capgemini.comof the community operator are divided into three main categories. ABOUT THE COMPANY: With 112,000 people in 40 countries, Capgemini is one of the world’sLong term activities foremost providers of consulting, technology and outsourcing services. Capgemini’s Energy, Utilities & Chemicals Global Sector servesThese activities focus on the development of consumption and the business consulting and information technology needs of manyproduction portfolios in such a way as the objectives of the of the world’s largest players in this industry. The Group reported 2010 global revenues of €8.7 billion.community are met. The operator is responsible for recording thedata, performing the analysis and providing the results on behalf of www.capgemini.com/energy.the community, and traditional utilities can take on this role as well.38 METERING INTERNATIONAL ISSUE - 3 | 2011