Ripping profits from power lines

Business Spectator
Thursday 20/5/2010 Page: 1

There's a pretty big reason why most energy utilities don't want to provide their consumers with greater access to energy usage data: they don't want to lose their business.

The global energy sector - a dull, regulated, protected and predictable industry - is facing its greatest upheaval, not from the threat of an emissions trading scheme or a carbon price, but from information hungry technology companies that want to turn the industry on its head by offering electricity to consumers for free, bundled in a package that could include home entertainment systems, household appliances or software management systems.

It has been estimated by management consulting firm McKinsey & Co that an investment of $US520 billion over the next 10 years could reduce national energy demand in the US by 23% and result in $US1.2 trillion in savings. Little wonder that the utilities sector - which has based its business model in selling as many electrons as it can - is stonewalling. International Power's rear-guard action to resist any government energy efficiency measures - it argues that any regulation that requires its heavy emitting Hazelwood and Loy Yang B power stations would destroy their value - reflects the fear in the sector.

But they are under attack, not just from environmentalists or government climate change policy, but other businesses that see an opportunity presenting itself as smart grid technology matures and the industry grapples with a potential lack of capacity. Last month, a group of 45 major US companies and organisations - including Google, Intel, GE, Whirlpool, and AT&T - asked President Obama in an open letter to promote greater consumer access to energy usage data. "By giving people the ability to monitor and manage their energy consumption, for instance, via their computers, phones or other devices, we can unleash the forces of innovation in homes and businesses," they said. And what they didn't say was that these companies could emerge to dominate the energy industry in ways that the utilities sector could never have imagined.

A report by Ernst & Young this week entitled Seeing Energy Differently underlines what's at stake for the utilities sector. It says about $US200 billion will be spent world-wide on smart grids in the next five years in response to the need to incorporate renewable energy sources, meet increased demand and improve efficiency and replace outdated infrastructure. How they manage that transformation could decide their future and how much third party corporates such as Google, Intel and others come to dominate the industry. EY defines the options as one of evolution or revolution.

In the former, EY sees the simple business of energy supply evolving into a new, sophisticated form of energy service, in which utilities form partnerships with third parties help consumers manage their energy use and react to prices to find the best deals. That way, they (the utilities) retain the power, so to speak.

Under the revolution scenario, the power and utilities companies come under competitive attack all along the value chain. New interactive customer relationships and new competitive models will allow third parties to enter the market. "This creates a revolution," EY notes. "Market rationalities and business strategies change completely." It could be exciting for the consumer, if less so for the utility. Which is why the likes of Google, GE, Intel, AT&T and Whirlpool are so keen on bypassing the utilities to get access to more information about energy usage.

By packaging offerings such as appliances, home entertainment and communications systems with an energy service, the likes of these companies don't lose business if the customer uses less energy, as they will be encouraged to do. Power utilities, however, have a business model that means less energy consumption equals less profit. That will have to change, and may need to do so quickly.

"The power utilities industry has no interest in revolution," says Helmut Edelmann, the German-based head of the global power and utilities smart program at Ernst & Young. But if a Microsoft, Apple or a Google can come up with a 'killer application' then there will certainly be a revolution. "They have got strong brands and could emerge as dominant players, at least on the consumer end of the business," Edelmann says.

Indeed, the EY report identifies exactly where the utilities are vulnerable. In home services, they are under threat from automotive, real estate, consumer product, media, entertainment companies that can provide home automation, electric vehicles and energy management services.

In billing and information, the threat comes from telecommunication, technology and retail companies specialising in monthly billing and energy consumption information, specialist metering companies will muscle in to the utilities market, telecommunication and technology companies will grab the communication and IT side of the business, industrial service companies will emerge to deliver electricity to the consumer, and clean-tech automotive and retail groups will provide decentralised and or renewable generation.

And then there is the prospect that the likes of Google, which has investment all along the value chain, will celebrate in the creation of a new 'energy internet' and try to put it all back together again under a single brand name. Their own, of course.