The world around us is becoming digital right in front of our eyes. In this brand-new world of digital energy there will be several technological driving drivers. One of them will almost certainly be Blockchain.
Each day processes are being digitalized and physical assets are increasingly represented by their digital twins. This ongoing process of digitalization is swiftly surmounting obstacles and enabling things that were unthinkable just a few years ago.
When people think of digitalization, to most of them, three associations come to mind: smartphones, apps and the internet. We interchangeably use all these resources during pretty much any day of the week. Out smartphones can wake us up in the morning. They help us check the news, look at our emails and keep in touch with the people around us. Our photos can be uploaded to a cloud, our notes and travel records can be digitally accessed.
One way or the other, a large proportion of people use the internet virtually every single day. During each of these days we create approximately 2.5 quintillion (1018) bytes of data. According to a recent report by IBM, over 90% of data flowing around the internet did not exist just 3 years ago. What’s more is that every day new apps, new devices and new sensors appear. All of them are adding to the growing amount of data collected worldwide.
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Digital platform as a business model for energy utilities of the future: The insight
Three key characteristics of blockchain technology make it the new centerpiece of trust.
Accessibility:
A platform needs to be easily accessible. Participants on both sides of the equation must be able to connect, share, transact and contribute with ease and from anywhere.
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Gravity:
A platform needs to be able to attract participants. Having a critical mass of both customers and suppliers is essential for the functioning of a market. The same applies to platforms.
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Fertility:
A platform needs to be fertile ground for the creation and exchange of value. It needs to facilitate connections that will create synergetic effects.
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To build a successful platform one side of the equation needs to be subsidised in order to stimulate the other side to participate. Choosing the side to get subsidised is considered to be the most important decision regarding the development of any platform. Simply because there are plenty of successful platform based companies surviving and thriving on the market, does not necessarily mean that constructing a feasible platform business is easy. In all truth, constructing a platform is an arduous task, both time-consuming and capital-intensive. Pursing a platform strategy in no way improves the chances for success. Like any other business venture, platforms fail more often than they succeed. This is why it is important to bear in mind all the headwinds these endeavours face. Platform strategy is not about selling a good or a service online. It’s about involving actors from supply and demand side of the equation and creating an environment that facilitates innovation and value creation through a synergetic effect.
A successful platform functions as an easy-accessible network through which participants can create value, exchange information or purchase goods and services with a few clicks.
To build a successful platform one side of the equation needs to be subsidised in order to stimulate the other side to participate. Choosing the side to get subsidised is considered to be the most important decision regarding the development of any platform. Simply because there are plenty of successful platform based companies surviving and thriving on the market, does not necessarily mean that constructing a feasible platform business is easy. In all truth, constructing a platform is an arduous task, both time-consuming and capital-intensive. Pursing a platform strategy in no way improves the chances for success. Like any other business venture, platforms fail more often than they succeed. This is why it is important to bear in mind all the headwinds these endeavours face. Platform strategy is not about selling a good or a service online. It’s about involving actors from supply and demand side of the equation and creating an environment that facilitates innovation and value creation through a synergetic effect.
It is no coincidence that today’s most valuable companies are based on platforms. Firms like Alphabet, Amazon, Apple, Facebook, Microsoft, Alibaba, Tencent, AirBnb, Uber, Xiaomiand DidiChuxingare best known examples representing countless other firms that have built their businesses by facilitating digital innovation across various ecosystems of the economy. A recent report listing over 200 current or former “unicorns” revealed that around two thirds of them are based on platforms. In the brave new age of the digital competition, traditional rules of business disappear. In recent years, digital platforms based on artificial intelligence, big data and machine learning are defying established laws and writing new ones.
Uber rents car rides and yet it owns no cars and Airbnbrents rooms yet it does not own a single one. These two companies are based on platforms that enable users to connect with willing service providers. What’s even more interesting is the fact that Airbnb’svalue surpassed long standing hotel chains of Marriot and Hilton.
In this time of rapid change it is important to remember that some business postulates remain no matter the circumstances. When developing a platform based firm, a law that’s equally true for any traditional business endeavour must be obeyed: the new company must be able to survive different market circumstances and ultimately outperform its competition.
Being successful is not about building a platform. It’s about proactively creating value.
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Transactions require coins. There are three ways of acquiring them: by selling goods/services, by a straightforward purchase or by “mining”. Mining can start after your wallet is connected to the Bitcoin Network. It is done by specialized devices with high processing power that are able to solve complex programming problems. Miners are rewarded for creating blocks of validated transactions and incorporating them into the blockchain.
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Transactions require coins. There are three ways of acquiring them: by selling goods/services, by a straightforward purchase or by “mining”. Mining can start after your wallet is connected to the Bitcoin Network. It is done by specialized devices with high processing power that are able to solve complex programming problems. Miners are rewarded for creating blocks of validated transactions and incorporating them into the blockchain.
First you need a place to store your coins. This involves setting up a unique ledger – your wallet. The ledger is protected by public key infrastructure guarding both your cash and your identity. In essence, it resembles a cheque book. But unlike a regular cheque book, the ledger is visible to anyone using the network.
Transactions require coins. There are three ways of acquiring them: by selling goods/services, by a straightforward purchase or by “mining”. Mining can start after your wallet is connected to the Bitcoin Network. It is done by specialized devices with high processing power that are able to solve complex programming problems. Miners are rewarded for creating blocks of validated transactions and incorporating them into the blockchain.
Conventional businesses of the energy sector are being disrupted
Looking at the energy sector, competition is composed mostly of conventional businesses. It should be noted here that this does not mean the energy industry is easy to enter. Competition is fierce, margins are slim, the sector is based on a behemoth of a system, government regulation is strict and the demand for continuous supply is of paramount importance.
A new entrant does not only have to fit within this frame, but has to be able to thrive within a highly constricting environment. It has to achieve financial viability whilst operating a complex system. It has to keep providing a reliable and affordable source of energy whilst under constant regulatory scrutiny. Changing government policies, social pressures, debt obligations towards investors and all sorts of different competition make things even harder. What makes developing a platform based utility even more difficult is the fact that the energy sector is highly regulated, but digital platforms (as a relatively new area for lawmakers) are not. This imbalance has the potential to cause considerable issues during the next few decades as digital will enter all pores of the energy industry.
Synergetic effects of various market forces such as policy measures, technological innovation and customer evolution facilitate new forms of competition and the emergence of disruptive players. These occurrences are happening at rapid pace and at a global scale fundamentally transforming the energy sector. Digitalisation, decentralisation and decarbonisation do depend on policy support and economic circumstances. However, it is only a matter of time until they reach every single country and every single home with an electrical connexion.
The future of utilities already present on the market heavily relies on what they are doing to enhance their digital capabilities at this very moment. In this context, numerous utilities have already started to engage themselves in digitalising their operations. Given the many restraints typical of the energy industry, this is an arduous, time-consuming process. In general, despite the fact that utilities are increasingly aware of the changes their business models require in order to stay competitive on the new market, their revelations are often not translated into practical actions.
Conventional businesses of the energy sector are being disrupted
When difficulties associated with digitalisation efforts will be surpassed, technical constraints resolved and when regulation will no longer present an issue, utilities start operating as platforms. And this will happen. Soon.
So why should utilities operate as platforms? Oftentimes a stand-alone service or product is the optimal way of achieving profit. In other words, platform thinking isn’t a perfect fit for each industry.
Digital platforms as a business model of an energy utility
There are two reasons why platform-orientated strategy should be applied by an energy utility.
First. In a liberalised energy sector, energy suppliers should be registered as separate legal entities with regard to energy producers. Electricity is produced by a power producer, transmitted by a transmission system operator, distributed by a distribution system operator and then supplied to end consumers. This means that a utility selling electricity to end consumers can act only as a procurator of a commodity. Its job would then be to offer a reliable and affordable supply through the use of various transactions. After establishing contractual connections enabling the flow of energy with all the necessary players of the energy supply chain, the utility could focus on upgrading its service and building an ecosystem that could benefit all involved participants. This type of an entity would not be required to own energy related infrastructure, but would rather rely on different players of the supply chain to produce and deliver the required amounts of energy.
To sum up, if a utility can function only as a commodity procurator and a service provider, without owning energy related assets, having a platform would be essential in differentiating among other suppliers. Especially considering the slim margins that the energy sector is currently facing. A platform can: provide a better service for clients, enable easier and more transparent monitoring of consumption, optimise energy management models and simplify bill handling processes.
Second. There is only one type of electricity. Since it is always the same type of good you sell, the major distinction between different energy suppliers is cost related. When you base your business on providing a service rather than a particular type of good, platforms are the way to go. Why? The answer is simple. A platform that entails an open innovation model procures capabilities from outside firms. These capabilities raise the platforms level of service and inevitably provide a source of added value for the entire ecosystem. The opportunity is there. It’s only a question of making the first step and creating something that will attract customers.
The utility platform must function as a connective tissue that connects various players of the energy ecosystem and enables a digitally controlled, decentralised flow of energy throughout the system.
Unfortunately, unlike other sectors, where platform companies can often act simply as matchmakers between supply and demand, the story in the energy sector is quite different. And much more complicated. This is because of the specificities of electricity as a commodity and the gravity of the energy system itself. In order to be successful, a platform operating in the energy arena needs to be able to draw real time data from countless physical components of the system. It then needs to utilise this data to optimise system’s operation (again in real time) without endangering the reliability of supply. When numerous consumers, regulatory restrictions and technical issues are added to the equation, we are presented with an enormous task of reconciling these constraints with needs and desires put in front of a platform.
As one can assume, there is no magic formula or a singular path towards achieving a satisfactory functionality of such a platform. However, there are certain factors that have a significant impact on the effectiveness of one’s digital efforts. In broad terms, a utility needs to foster an environment that can offer a continuative engagement of various actors all aligned towards ensuring an agile, open ecosystem that facilitates the development and application of new concepts and technological solutions.
On this path it is of extreme importance to adopt an open-minded approach and embrace new partnerships. Having an innovative mindset and enabling an open innovation model are prerequisites of a successful, digitally-based company. In our mind, this will prove particularly true in the case of the energy industry where we see the utility serving as glue connecting different players across the energy supply chain. A platform based utility with an open innovation model will also engage new entrants. They will contribute to the enhancement of the system, while at the same time profit from the ecosystem created by the utility.
Where do most utilities place their investment euros?
Looking at recent reports, utilities are starting to get involved in digitalising their operations and becoming more customer centric.
However, when it comes to investments, most of them focus on improving the management of distribution networks. The installation of smart meters is a first step towards better system management, but also towards offering a string of new services to customers. Having a network of smart meters can provide data on real-time consumption rates tied to each micro location in the grid. This data can be leveraged into creating better forecasts regarding demand-supply curves ultimately enabling the optimisation of energy management models. On the other hand, connecting smart meters to home energy management systems would enable customers an easy overview of how they consume energy and an easy way to control that same consumption. Customers have a profound need to control their energy bills and demand more transparency from their respective utilities. Second area of interest for utilities are electric vehicle charging systems.
Considerable efforts are invested in pursuing the implementation of metering solutions in the distribution grid. This entails the implementation of advanced metering infrastructure and monitoring systems which is considered to be one of the first steps towards digitally connecting with energy customers. Meanwhile, during the entire time of the transformational process utilities have a responsibility to provide a reliable and affordable supply of energy. What further complicates things is the strict regulatory framework within which the energy industry operates. Oftentimes the regulatory hurdles utilities have to cross present major obstacles in moving more agilely towards their goals.
In a truly platform-orientated firm there are no borders for value creation. Assets and outputs are created and developed outside the mother organisation.
