Unlocking new value by becoming invisible
How to set up a flexible electricity retail
Electricity end-users are overwhelmingly passive and unengaged
End-users consume electricity largely without thinking about it, and typically without paying at the point of use. Occasionally, they may switch their supplier to save relatively modest amounts of money or because of poor customer service. For many years, there has been talk about consumers taking a more active role in the market. But real-world changes have generally been limited to either very large consumers or small market sub-segments with higher levels of engagement (e.g. prosumers or early adopters of new technology).
Electricity retail today is primarily a billing and debt collection business. The vast majority of consumers simply do not wish to engage actively in energy markets. Consequently, electricity supply remains commoditised and retailers' profit margins are small.
The status quo is changing
We now see three parallel trends that will disrupt the passive consumer business model and have the potential to de-commoditise electricity supply. Firstly, new value pools: The need for demand-side flexibility has been driven up an ever-increasing penetration of renewable energies, which has in turn led to a larger value pool.
Secondly, increased volumes of flexible demand: The convergence of distributed electricity, smart-home, heat and mobility sectors is creating a rapidly growing pool of flexible demand from onsite generation to appliances and heating to electric vehicles. Finally, enabling technology: Digital technology has advanced to the point where it can enable previously locked-up sources of flexibility and allow them to be managed together to offer a 'dispatchable' block of power to help balance the system. We can now envisage a world where a virtually unlimited number of individual sub-premises level demand sources can be monitored and managed actively in real-time as part of an aggregated portfolio.
A range of new 'flexibile retail' business models are emerging
At the simpler end of the spectrum, and most widespread, we see time-of-use tariffs proliferating on many markets. These allow consumers to change their consumption in response to simple price signals, but most offerings are still relatively static and do not reflect real-time value. Most importantly, the success of these products requires consumers to engage - which most still do not wish to do. At the more innovative end of the spectrum, we are beginning to see the emergence of truly new business models, where retailers take active control of their customers' energy use. This could be through subtle short-term changes to the temperature of heating, through smart EV charging, or even through smart appliances. The attraction of these models is that consumers can remain unengaged on a day-to-day basis whilst still extracting value from the flexibility embedded in their demand.
How should the flexible retail business of the future be created?
The market for flexible retail services is young and winning and losing business models are not yet clear. Most offerings so far have been bolt-ons to existing retail models, and the true disruptors have yet to emerge. Ultimately, deep change must be consumer led, but in a world of unengaged consumers, the winners will be the ones that can make the 'boring details' invisible.
We make four recommendations:
- Increase capability to forecast and monetise the value of flexibility. Retailers will need a deep understanding of all aspects of the markets in which they operate, especially national and local flexibility markets. The ability to forecast accurately and trade effectively in order to monetise transient value in near real-time will be a key differentiator.
- Build flexible customer volumes fast. Building a customer portfolio that has high inherent levels of flexibility embedded within smart homes, flexible heating and EV charging (and non-household demand flexibility). Early movers will have a competitive advantage, and retailers should seek to cross-sell relevant technologies, whether directly or through partners.
- Make enabling technology invisible. Most consumers want to remain unengaged, so technology should be seamless and 'just work'. With this mindset, customer contact should be minimised, since it generally means something has gone wrong. As the market matures, invisibility will become a threshold criterion for flexible retail; if consumers must spend time and effort to make the model work, they will simply not bother.
- Do not forget the basics. Compliance. Risk management. Accurate and timely billing. Cash collection.
The future of downstream power is uncertain. But the direction of travel is clear. Winning business models will make managing complexity a competitive advantage. The rest will be disrupted.
