The Digital Uptake of Energy Players and Consumer Engagement
Dr. Evangelo Damigos; PhD | Head of Digital Futures Research Desk
- Sustainable Growth and Trends
Publication | Update: Sep 2020
The growth in decentralised, distributed energy resources such as solar, wind and the evolving storage technologies, coupled with smart digital systems to drive greater efficiency through demand-side management is staggering. Not to mention the potential impact of a blockchain enabled peer-to-peer energy market. When implemented correctly they have the potential to create opportunities for value capture across the entire value chain by breaking down inter-sectoral boundaries, increasing flexibility and enabling integration across the entire system. There is immense potential in AI / Machine learning to bring impactful system optimisation and insight identification, making for more efficient, more sustainable operations.
However, according to Nick Hart, Savannah-Group Commercial lead, the truth is that there is still a long way to go in the energy / power arena with regards to digital uptake. Change tends to happen slowly in this industry and uncertainty around policy won’t speed up the industrial or cultural evolution that is needed for the future.
With the energy businesses being consumer-centric, is requiring energy companies to focus on harnessing the power of big data and smart appliances to drive revenues through a reinvented, high-engagement experience for consumers.
‘Consumer’ is the operative word here. Those able to respond quickly and scale new technology are forcing the competition to play catchup. While some industries see relatively fast returns on investment in digital technologies through gains in supply chain efficiency, restructuring of product pipelines, reinvigorating product lifecycles and enhancing customer experience, the unique characteristics of the energy supply chain make digital adoption a radically different proposition. Moreover, it suffers from an intrinsic challenge: it is not interesting to consumers. Yet. It is a necessity, not a luxury, and while a fundamental need its inherent value is only demonstrated through its failure. In addition, power provided by one supplier is indistinguishable to that of the next, significantly diminishing the value and interest in the provider themselves. A difficult proposition to manage and market.
At the same time, one thing consumers do seem to care about is the price. According to the Ofgem Consumer Engagement Survey, over 90% of UK energy customers cited price as the main motivation for switching providers. But having already been through market liberalisation and unbundling, energy companies have few options left to capture value from large consumer/retail-focused digital investments other than to pass costs onto the consumer, itself a strategy fraught with reputational and political risk. Overlay the incoming price-cap and it looks all the less enticing for the asset-heavy incumbents, as borne out by the wobbles in the creation of the npower/SSE entity.
The uptake of the ‘smart home’ has been slower than many forecast, in part due to the lack of appetite from all parties to carry the cost. The housing stock in the UK is largely old and difficult to retrofit, and new build still doesn’t require such systems to be applied at build (unlike say Holland) and therefore exacerbates the problem. There is no money in retail for the large structured utilities and certainly a very little appetite for any investment. IT systems (expensive and often overpaid for) and digital platforms have been the undoing of retail – badly specified, badly coded and badly maintained. As a result, some major players (e.g. EdF, RWE, SSE) are shaping up to exit retail altogether and leave the retail piece of the puzzle to businesses more, (if not necessarily better) prepared to take it on like Shell, OVO or Good Energy.
A limit on available capital to invest into retail has meant Energy companies have necessarily taken a short-term view to the potential returns from introducing the digitisation of energy into consumers’ homes.
These market developments serve to highlight the need for energy companies to go back to basics and focus on core strengths. Optimal deployment of capital and technology, efficient asset management and the management of merchant risk in technical and commercially complex environments. In doing so, digital strategies with clear pay-back can be (and indeed have been) developed around their core strengths, breaking down boundaries between segments, increasing flexibility, and enabling efficient operation through asset operation, predictive maintenance and integration across entire systems and portfolios.
The customer and retail operations can be left to specialists who can deploy expertise in mass marketing to customers, high volume customer management, and the investment and development of the IT systems and billing platforms that have proven the undoing of some.
Such a strategy of consumer ‘decoupling’ and rethinking digital strategy in terms of innovative go-to-market strategies that provide growth in new ways may grow in importance. Energy companies would no longer need to own the end-to-end supply chain.
As companies feel their way into the transition, wait for successful strategies to emerge and re-evaluate portfolio of core assets, joint ventures, partnerships, and mergers will remain important tools to weather the current storm of technological and regulatory uncertainty.
Until the energy transition yields broader availability of renewable energy infrastructure and electric vehicle usage is achieved, consumer engagement levels are likely to remain frustratingly low. Change is not going to be overnight and, contrary to other industries, there is no sign it will be driven from the consumer end.
Nick Hart, Savannah-Group Commercial lead, is an experienced interim executive recruiter. He has spent the past eleven years placing senior executives across a broad range of sectors and industries. Nick has made numerous senior executive placements including permanent and interim Chief Executives, Chief Finance Officers, HR Directors, and Transformational Leaders.
Objectives and Study Scope
This study has assimilated knowledge and insight from business and subject-matter experts, and from a broad spectrum of market initiatives. Building on this research, the objectives of this market research report is to provide actionable intelligence on opportunities alongside the market size of various segments, as well as fact-based information on key factors influencing the market- growth drivers, industry-specific challenges and other critical issues in terms of detailed analysis and impact.
The report in its entirety provides a comprehensive overview of the current global condition, as well as notable opportunities and challenges.
The analysis reflects market size, latest trends, growth drivers, threats, opportunities, as well as key market segments. The study addresses market dynamics in several geographic segments along with market analysis for the current market environment and future scenario over the forecast period.
The report also segments the market into various categories based on the product, end user, application, type, and region.
The report also studies various growth drivers and restraints impacting the market, plus a comprehensive market and vendor landscape in addition to a SWOT analysis of the key players. This analysis also examines the competitive landscape within each market. Market factors are assessed by examining barriers to entry and market opportunities. Strategies adopted by key players including recent developments, new product launches, merger and acquisitions, and other insightful updates are provided.
Research Process & Methodology
We leverage extensive primary research, our contact database, knowledge of companies and industry relationships, patent and academic journal searches, and Institutes and University associate links to frame a strong visibility in the markets and technologies we cover.
We draw on available data sources and methods to profile developments. We use computerised data mining methods and analytical techniques, including cluster and regression modelling, to identify patterns from publicly available online information on enterprise web sites.
Historical, qualitative and quantitative information is obtained principally from confidential and proprietary sources, professional network, annual reports, investor relationship presentations, and expert interviews, about key factors, such as recent trends in industry performance and identify factors underlying those trends - drivers, restraints, opportunities, and challenges influencing the growth of the market, for both, the supply and demand sides.
In addition to our own desk research, various secondary sources, such as Hoovers, Dun & Bradstreet, Bloomberg BusinessWeek, Statista, are referred to identify key players in the industry, supply chain and market size, percentage shares, splits, and breakdowns into segments and subsegments with respect to individual growth trends, prospects, and contribution to the total market.
Research Portfolio Sources:
Global Business Reviews, Research Papers, Commentary & Strategy Reports
M&A and Risk Management | Regulation
The future outlook “forecast” is based on a set of statistical methods such as regression analysis, industry specific drivers as well as analyst evaluations, as well as analysis of the trends that influence economic outcomes and business decision making.
The Global Economic Model is covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure. We aim update our market forecast to include the latest market developments and trends.
Review of independent forecasts for the main macroeconomic variables by the following organizations provide a holistic overview of the range of alternative opinions:
As a result, the reported forecasts derive from different forecasters and may not represent the view of any one forecaster over the whole of the forecast period. These projections provide an indication of what is, in our view most likely to happen, not what it will definitely happen.
Short- and medium-term forecasts are based on a “demand-side” forecasting framework, under the assumption that supply adjusts to meet demand either directly through changes in output or through the depletion of inventories.
Long-term projections rely on a supply-side framework, in which output is determined by the availability of labour and capital equipment and the growth in productivity.
Long-term growth prospects, are impacted by factors including the workforce capabilities, the openness of the economy to trade, the legal framework, fiscal policy, the degree of government regulation.
Direct contribution to GDP
The method for calculating the direct contribution of an industry to GDP, is to measure its ‘gross value added’ (GVA); that is, to calculate the difference between the industry’s total pretax revenue and its total boughtin costs (costs excluding wages and salaries).
Forecasts of GDP growth: GDP = CN+IN+GS+NEX
GDP growth estimates take into account:
All relevant markets are quantified utilizing revenue figures for the forecast period. The Compound Annual Growth Rate (CAGR) within each segment is used to measure growth and to extrapolate data when figures are not publicly available.
Our market segments reflect major categories and subcategories of the global market, followed by an analysis of statistical data covering national spending and international trade relations and patterns. Market values reflect revenues paid by the final customer / end user to vendors and service providers either directly or through distribution channels, excluding VAT. Local currencies are converted to USD using the yearly average exchange rates of local currencies to the USD for the respective year as provided by the IMF World Economic Outlook Database.
Industry Life Cycle Market Phase
Market phase is determined using factors in the Industry Life Cycle model. The adapted market phase definitions are as follows:
The Global Economic Model
The Global Economic Model brings together macroeconomic and sectoral forecasts for quantifying the key relationships.
The model is a hybrid statistical model that uses macroeconomic variables and inter-industry linkages to forecast sectoral output. The model is used to forecast not just output, but prices, wages, employment and investment. The principal variables driving the industry model are the components of final demand, which directly or indirectly determine the demand facing each industry. However, other macroeconomic assumptions — in particular exchange rates, as well as world commodity prices — also enter into the equation, as well as other industry specific factors that have been or are expected to impact.
Forecasts of GDP growth per capita based on these factors can then be combined with demographic projections to give forecasts for overall GDP growth.
Wherever possible, publicly available data from ofﬁcial sources are used for the latest available year. Qualitative indicators are normalised (on the basis of: Normalised x = (x - Min(x)) / (Max(x) - Min(x)) where Min(x) and Max(x) are, the lowest and highest values for any given indicator respectively) and then aggregated across categories to enable an overall comparison. The normalised value is then transformed into a positive number on a scale of 0 to 100. The weighting assigned to each indicator can be changed to reﬂect different assumptions about their relative importance.
The principal explanatory variable in each industry’s output equation is the Total Demand variable, encompassing exogenous macroeconomic assumptions, consumer spending and investment, and intermediate demand for goods and services by sectors of the economy for use as inputs in the production of their own goods and services.
Elasticity measures the response of one economic variable to a change in another economic variable, whether the good or service is demanded as an input into a final product or whether it is the final product, and provides insight into the proportional impact of different economic actions and policy decisions.
Demand elasticities measure the change in the quantity demanded of a particular good or service as a result of changes to other economic variables, such as its own price, the price of competing or complementary goods and services, income levels, taxes.
Demand elasticities can be influenced by several factors. Each of these factors, along with the specific characteristics of the product, will interact to determine its overall responsiveness of demand to changes in prices and incomes.
The individual characteristics of a good or service will have an impact, but there are also a number of general factors that will typically affect the sensitivity of demand, such as the availability of substitutes, whereby the elasticity is typically higher the greater the number of available substitutes, as consumers can easily switch between different products.
The degree of necessity. Luxury products and habit forming ones, typically have a higher elasticity.
Proportion of the budget consumed by the item. Products that consume a large portion of the consumer’s budget tend to have greater elasticity.
Elasticities tend to be greater over the long run because consumers have more time to adjust their behaviour.
Finally, if the product or service is an input into a final product then the price elasticity will depend on the price elasticity of the final product, its cost share in the production costs, and the availability of substitutes for that good or service.
Prices are also forecast using an input-output framework. Input costs have two components; labour costs are driven by wages, while intermediate costs are computed as an input-output weighted aggregate of input sectors’ prices. Employment is a function of output and real sectoral wages, that are forecast as a function of whole economy growth in wages. Investment is forecast as a function of output and aggregate level business investment.