The latest issue of EY’s Renewable energy country attractiveness index (RECAI) was released earlier today, offering the Big Four consultancy’s latest views on the international energy market.
As well as the newest update to the index itself - which saw the UK hold steady at tenth place following a prolonged period of shifting up and down the rankings - issue 50 took an in depth look at the changing state of retail energy and became the latest voice of industry to point out that a “revolution” is underway.
Bringing together experts from within EY and externally around the world, here are the main takeaways from RECAI 50: The retail energy revolution.
'The energy supply business is in flux'
As pointed out by Ben Warren, EY global power & utilities corporate finance leader, at the very start of the index digitisation, decentralisation and decarbonisation of the energy system is promising to transform the retail energy market.
With new technologies and software coming to the fore and transforming the relationships between generators and energy consumers, who are abandoning the 'Big Six' in response to the growing number of independent suppliers, power within the market is shifting away from the traditions of incumbents.
As Stewart Reid, head of asset management and innovation at Scottish and Southern Electricity Networks (SSEN) explained to EY, distribution utilities are turning from one way “brick-and-mortar supermarkets” to something more.
“The role of the DSO [distribution system operator] then would be like the Post Office,” he says, providing the platform “to tell customers, on a real-time basis, that they can transfer power from A to B, when you can do it, and how much it’s going to cost. Utilities become a platform for facilitating the trade of energy across the network.”
This is causing a fundamental challenge to energy market participants to keep up and adopt new modes of operation or as Branden Lane, senior manager on EY’s advisory team explained: “The risk is that at some point they will pass the inflection point where they are too late to catch up.”
Leveraging closer relationships with active consumers will be key
Those that prove to be successful, according to Warren, will have been able to turn this change in consumer activity to their advantage, working closer with them to expand into high value-services than merely supply.
Markus Nitschke, a spokesman for German utility E.On, describes this service as one more akin to a bank than an energy company, using both onsite and remote battery storage to allow consumers to make deposits and withdrawals.
“In the future, we won’t be dealing with our own energy only — we’ll be handling energy produced by the consumer, servicing their account,” he said.
Collaboration or consolidation of market players will be needed
While undoubtedly larger energy suppliers and utilities have been subject to a shrinking customer base – between 2013-16 the market share of the Big Six fell from 99% to 85% - the smaller market entrants are not sustainable according to EY’s report.
“It is questionable whether the insurgents’ investors will have the patience, or the deep pockets, to allow them to grow organically to become self-sustaining,” Warren suggests.
Collaboration could therefore offer the answer; whether through partnerships or acquisitions, incumbents and insurgents will need to come together if either are to succeed.
For example on peer-to-peer trading, one of the new technologies already emerging in an age of renewables, Lane believes that some retailers will look to acquire or partner with providers of technology platforms for this purpose.
“We expect that some of the big retailers will look to snap up, or partner with, platform providers: if they can scale those platforms across their existing customer base, they can make a big jump forward in market position and establish a base into which they can plug other technologies,” he said.
This trend will also aid new energy companies, who will be unlikely to take over the market alone despite their recent growth.
Keeping up with and developing technology
Another advantage of joint-working in this way is the impact it will have on companies’ ability to keep up with the technology needed to address the changing market. Warren states that where incumbents lack agility, insurgents lack sustainability over the long term.
Whether large or small the role of IT will be paramount going forward, with the move to a digitised future bringing new challenges, not least getting hardware – batteries, smart meters and the like – working with the software required in the future.
This is already being felt in certain instances, such as the Cornwall Local Energy Market (LEM), a pilot funded by utility Centrica and the EU. It is installing technology in 150 homes and businesses that will allow consumers to test the use of flexible demand, generation and storage.
According to programme director Matt Hastings, “Alongside a lot of technical integration - how do you optimise your battery and your EV [electric vehicle], for instance? There’s a need for software to integrate them as well.”
“We need a whole new set of tools we’ve never had before,” added Josh Castonguay of Vermont, Canada-based utility Green Mountain Power, showing this change is one that is needed across the globe.