While new opportunities do exist the reality is that for most of the traditional electricity companies it is difficult to realise these. There are several reasons for that:
- In most countries, either directly through ownership or indirectly through regulations, governments have a dominant influence on the sector. A lack of political vision and leadership and an inability of regulators to step in are a serious hindrance to settling on the direction of the industry. Political indecisiveness and lack of bipartisanship is perhaps the worst thing that can happen in this situation as it paralyses the industry.
- But at the same time, based on the industry practices and very long-term investment cycles that have dominated the industry for decades, the industry of today is risk-averse and led by management that in most cases is unable to seize the new opportunities that are becoming available within an increasingly disruptive environment.
- Furthermore, the transition from the old silo-based energy economy to the new open-ended, interconnected one is very complex, and this transition will be messy. However the industry has no choice but to tackle this and increase its pace of change. This applies both to the industry and to its policy-makers.
Most governments and incumbent industry players around the world are grappling with these issues. Where we do see leadership and innovation is in places where cities are still operating their own electricity networks. There are many great examples in the USA, where over 60 cities are involved in using their electricity networks to build smart cities. This is strongly supported by the communications regulator in America, the FCC. There are also some good initiatives from the local DSO within the Amsterdam Smart City project.
As a consequence all of the above changes will happen. It is hard to predict exactly how it will work out, but there are several trends and developments already taking place which will have a profound impact on the shaping of the industry.
- Disruptive (often unexpected) developments from outside the industry, based on innovations coming from companies – and their customers – operating in the digital/sharing/networking economy can result in rather rapid and massive changes that cannot be controlled by the industry, and most of the time not by governments either.
- In cases of continual lack of national political leadership this will force the industry to step up its role in new developments. In some cases state and local governments are showing more and better leadership than their national counterparts.
- Smart energy developments will increasingly be community/city-driven, with developments such as micro-grids, community storage, solar and wind farms, (smart/wi-fi-driven), LED street lighting.
Disruption is happening and the challenge for the industry is to run with it. However in some cases it is hard for the industry to take a leadership role because of current government policies, regulations and its own outdated business models. So changes, innovation, new business models and new value-added business opportunities will arrive from outside the industry. Some of the electricity companies will be able to break through this and participate and thrive in the new digital sharing and networking economy.
That is not to say that there will be a total demise of the traditional electricity industry, but the value chains will be totally different.
It is interesting to draw a parallel with the telecoms industry here. Twenty years ago companies such as Telstra and AT&T (USA) warned their governments that allowing for the ISPs/internet market to develop would lead to a meltdown of the telecoms network. The telcos still exist, but in relation to market capitalisation companies such as Google, Apple, Microsoft, Amazon, Facebook, etc are many times larger, with most of the value-added revenue flowing to these companies, while the telcos simply operate the underlying networks.
So what could the consequences be for the industry?
There are several scenarios:
- If the industry takes leadership, changes business models and starts developing new products and services for consumers, communities and cities along the lines mentioned above they can drive innovation and chase the new opportunities.
- If they don’t take leadership the development of smart buildings, smart homes, smart communities and smart cities will happen anyway and the new opportunities will largely bypass the industry.
- It is highly unlikely that we will move to a totally decentralised energy environment – so there will remain a significant centralized infrastructure to the industry, in which case given the absence of innovative leadership, the industry will become low value wholesale providers to the new innovators and those developing new energy business models.
In reality the incumbent industry is in many cases facing an uphill battle. Large investments are needed in new business models based on new and innovative technological developments (renewables, batteries, micro-grids, smart cities, etc) while at the same time revenues are declining. The natural tendency is to then cave in, protect the incumbent business and try to stop changes which undermine their old business model. (Similar to developments that saw the demise of Kodak, Nokia, and many casualties in the music industry, publishers, telcos, book industry, etc).
There is no doubt that in general the industry will survive; however the question is what their role will be, and what value will they be offering to their customers and their shareholders (whether private or public).