Why are energy crops reaching a slow demise?
Why are energy crops reaching a slow demise?
One stop digital interfaces such as Amazon as well as the growing use of smart phones and other internet based platforms such as Spotify and Facebook are impelling companies across the world to change how they interact with customers, as well as how they attract and retain business. We are actually in the midst of a customer-service revolution which is ripping apart whole industries from clothing retail to finance to logistics. Meanwhile back in the world of electricity, little has changed in 100 years let alone the last decade. But change will come, and it will come fast and this in turn is providing an opportunity to develop energy platform businesses which have scale and produce customer benefits that cannot be matched by smaller platforms. In Europe, some of the most forward looking utilities such as E.ON, Enel and EDP are attempting to build energy platform businesses but there are also a whole range of growth companies such as Thermondo, Next Kraftwerke and Sonnen in Germany, as well as Bulb, Limejump, Ovo Energy and Origami in the UK pushing into this area with new approaches and business models. This all leads to the question who the winners will be?
The winners will be those businesses that can provide their customers with a standout customer experience which means being able to secure and maintain trust, deliver clear customer benefits (best price for instance) and make the customer feel empowered (Spotify, for example, plugs you into the global market of music). Such entities also need to have scale to cover the large fixed costs of building such a platform, noting that the additional cost of adding an extra customer, one the platform has reached critical mass, is almost zero. Thus the key is to have a large customer base and to use the data about those customers as well as the whole value chain, all of which will enable the energy platform to continuously improve the customer experience and to drive greater benefits at a lower cost to increasing numbers of customers. This enables disproportionate market penetration that generates the scale which drives sustainable competitive advantage and thus achieves an unassailable self-reinforcing dominant market position. The opportunities are enormous.
This is why the decision of the German utility E.ON to rid itself of large scale power generation and to focus on their customer facing businesses (retail and distribution grid) is not only radical but also a good indicator for the direction of travel for many utilities. E.ON’s needs to become closer to its existing customers so they can optimise existing offerings and learn about their customer base so that new products and services can be launched which benefit different customer groups as well as the utility itself. The key is to integrate existing customer data into one platform which can be enriched with the aid of external information on customer finances, energy usage patterns, weather data, power prices, customer interest, and so on. This strategy is similar to that of the Italian utility Enel and the Portuguese utility EDP and these players have the big advantage that they already have large customer bases. But they have the disadvantages of having conservative and non-innovative cultures as well as incompatible legacy IT systems which are very costly and sometimes impossible to upgrade.
These are not the challenges of the vast array of growth companies with their new business models and exciting data analytics and customer experience platforms, which also have the advantage of not needing to invest large amounts of capital into grid and generation. These services can these days all be purchased from third parties just as Apple and the other platform companies use the telecommunications grid and production facilities of other firms. What the growth firms don’t have enough of is customers. There are many reasons for this, one of which is regulation, noting that in many states in the US there is still no competition in the retail area, which limits such businesses to states such as Texas and to a lesser extent California and parts of the east coast. In Europe, it is easier as there is a free market in the energy retail space, but it is costly and takes time to acquire customers. What is needed are marketing dollars to acquire those customers while at the same time making sure that they then receive benefits that are unmatched elsewhere. Again, think Spotify or Apple.
What is clear is that Amazon like platform businesses are coming to energy. What is not clear is who the winners will be. Will they be the more forward looking utilities like E.ON, Enel or EDP or will it be existing platform businesses like Amazon? Or will they be companies like Bulb, who recently attracted the well-known tech platform investor Yuri Milner (Facebook, Airbnb, Spotify, Alibaba) as a major investor, and this is highly significant as he is the first tech investor to invest into a downstream energy company.