Business model innovation to foster the energy transition

Guest contributor Emanuele Facchinetti discusses the changing realities of energy utility companies in the context of the energy transitions towards distributed low-carbon energy systems.

The first universal legally binding agreement on climate change recently signed in Paris represents ‘’a bridge between today’s policies and climate neutrality before the end of the century’’, as stated by the European Commission’s COP21 press release. This ambitious transition towards a more sustainable and carbon-free global energy system requires an unprecedented radical reorganization of the whole energy sector.

Across the last decennium, the long-established energy market has been exposed to a concurrence of new trends continuously increasing in momentum: the liberalization and unification of markets; the increasing market penetration of decentralised energy systems based on renewable energy or favouring energy efficiency measures; the consequent highly uncertain regulatory framework evolution; and last but not least, the global economic crisis.

As a consequence, the energy sector and its stakeholders stand today at the eve of a challenging and exciting revolution: the way energy services are generated, delivered and traded is expected to change completely in the coming years.

At present utility companies, the main actors of the energy market, are constantly losing profitability, and are therefore striving to find appropriate ways to adapt to the undergoing transition. Many of the largest European utilities, amongst others the German E.ON and EnBW, the French EDF, the Italian ENEL, and the Swiss REPOWER, in the last few months announced important reorientations of their activities mainly due to the fact that traditional business models no longer allow them to be competitive on the market.

Recently we have analysed the European and US energy markets with the objective to spot the innovative business models emerging at the current stage of the energy transition (Facchinetti and Sulzer, 2016). The analysis shows a clear tendency in favour of new business models addressing customer-owned infrastructures and focusing on customer-tailored solutions.

In order to remain in their dominant positions, utilities are urged to discontinue the adaptation of their traditional and long established business models focusing on the vertical integration of the business and with little or no customer preference consideration. Instead they should favour the development of new flexible business models built around customer’s needs and preferences. The energy transition is increasing customer autonomy, flexibility and influence. In brief, it is empowering the customers.

Photo by Emanuele Facchinetti

Our market analysis further confirmed that, at present, large investments in the energy sector are discouraged. Indeed, emerging business models appear to generally disfavour the ownership of the infrastructures and are only timidly addressing new lucrative business opportunities opened up by the progress of ICT technologies such as the offer of comprehensive and integrated services going beyond the energy supply (e.g. including mobility, home automation and security, telecommunication services). Needless to say, this evidence is compatible with today’s global economic slowdown and changing regulatory frameworks.

Undoubtedly, the pace and ultimately the success of the energy transition strongly rely on the capability of improving the energy sector’s attractiveness to large private investments. For this purpose business model innovation and policy makers have a pivotal role. On the one side, business model innovation should support the disruptive change of value proposition and value creation logic required to spot and exploit the emerging business opportunities. On the other side, policy makers should facilitate the latter process by implementing new regulations embracing the heterogeneity of decentralised energy systems.

This last consideration is fully aligned with the vision of the recently adopted European Energy Union Strategy. This initiative emerges as a promising opportunity to tackle the design of new flexible regulatory frameworks removing the existing market barriers hindering the customers from becoming the protagonists of the energy transition.

In this perspective, the legislation coordinating the relation between the wholesale and retail energy markets should be redefined to enable/facilitate the access of customers (or aggregation of customers) to new business opportunities. New policies are expected not only to allow but also to promote the development of business models focusing on customer-tailored solutions and potentially including services going across other market segments.

Another example of required action on the policy maker’s side is suggested by the sharing economy principles. In the era of Airbnb and Uber policy makers should recognise that the energy transition could only benefit from shared ownership based business models. New regulatory framework should encourage such approaches that are not considered, or considered to a minor extent, within the in force policies.

The energy transition is enabling more and more customers to generate and store energy at their homes in a truly decentralised way. Undeniably, this will affect more and more the business of centralised energy suppliers. It is time for the energy market and its stakeholders to capitalise on this change of paradigm and play a proactive role in the transformation tailoring new service-oriented business models to their customers. And policy makers should allow them to do it. Urgently.