Utility Week

28 | 9TH - 15TH FEBRUARY 2018 | UTILITY WEEK Customers Market view T he utilities market is transforming. The UK, in particular, has seen huge disruption, with the growing number of new entrants slowly but surely gaining market share. Back in 2013, large suppliers accounted for 95 per cent of the market. That has now decreased to 82 per cent. This year will be certainly an interesting time to see if and how the large suppliers adapt. Here are three predictions we think may play out. Money, money, money Despite 2017 seeing a drop in energy prices from big name suppliers, some still strug- gle to meet the competitive prices of new entrants. As such, we predict a greater reli- ance on outsourcing to increase cost flexibil- ity or perhaps even another merger between large suppliers, like the one between SSE and Npower in November. We have already seen a large acquisition last month with Shell entering the UK energy market and buying First Utility (which has been looking to diversify its consumer offer- ing to compete with larger suppliers for a while). This could spark further M&A by large suppliers in response, as they need to find a way to circumnavigate the cost issues facing them. That said, large suppliers could be at an advantage in early 2018 as the cold win- ter forecast may impact the profits of new entrants. This can already be seen this year, with energy supplier Future Energy ceasing trading. If the demand for gas increases and the new entrants do not have a strong trad- ing position, we could see more. Typically, large suppliers are in a more powerful trad- ing position than the new players, and there- fore may be in the perfect place to do better deals that do not affect their profit margins. The service gap The gap in customer service between new players and incumbent suppliers will increase over the next year. The utilities sector has spent a lot of time, effort and money to improve its customer experience and yet it is still viewed as the worst performing sector. This has meant fall- ing customer loyalty and they are now losing out to the new entrants who are more agile and neither weighed down by legacy systems nor poor reputation. Targeting a smaller pool of consumers allows new entrants to create a more personalised customer experience, and being digitally native allows for a simple and streamlined customer journey, especially when switching suppliers or moving home. Large suppliers must digitally transform their operating model within the next year or risk the gap becoming too large to close. While this has been an ongoing process for a few years, they will have to double down in 2018. The big question for large incumbents is to find the quickest and most efficient pathway to extract themselves from this cur- rent negative spiral. We are observing that large players are setting themselves three major goals: reduc- ing costs; improving customer service; and increasing innovation. However, most are attempting to achieve all three at once. This may not be achievable within the timeframe and it may be more advisable to pick one or The big changes ahead With the energy market undergoing profound transformation, James Forrest and Alain Bollack make some predictions about how the sector could pan out over the next 12 months. Customers two targets and focus on making sure those are successful before moving on to the next. Self-supply While cost reduction and customer experi- ence will be the main battleground, argu- ably the biggest disruption on the horizon is going to be large tech companies and cus- tomers leaving the grid. The price of alter- native energy and storage has decreased significantly faster than first expected. Bat- tery costs have decreased by 80 per cent from 2010 to 2016, with expectations that they will be at £140/kWh by 2020, and carmaker Tesla claims further reductions are coming, antici- pating that costs will drop below £ 74/kWh by 2030. This has given large companies, such as Microso and Google, the opportunity to begin testing ways to generate their own clean energy to become self-sufficient. For instance, Microso is testing windfarms to provide electricity for its data centres. This will cause a ripple effect, as smaller compa- nies will watch what the bigger players are doing and attempt to emulate as soon as the cost of renewables falls enough. While this is the imminent danger for utility companies, they must also keep a close eye on homeowners looking to do the same thing. We are already seeing significant developments in home renewables, with products such as Tesla's Powerwall 2.0 show- ing how far sustainable energy and battery storage has come in such a short time. While we are still a few years off this becoming a viable option for the typical homeowner, we have certainly seen an uptick in residential homes taking up local generation over the past year, particularly solar. This is largely because costs have fallen by 89 per cent from 2009-16, and are expected to fall by another 59 per cent by 2025. This should ring alarm bells for utili- ties. They need to adapt and start becoming the seller of renewables and storage, in order to remain relevant in the years to come. James Forrest, head of energy & utilities; and Alain Bollack, expert in smart energy services, Capgemini Consulting Key points Aer many years of slow change, small players are beginning to win significant market share. Outsourcing will increase as large players seek to drive down costs. A cold winter in 2018 could test the hedg- ing strategies of some niche companies. Large utilities have been beaten by new entrant competitors on service. The big players must transform their busi- nesses incrementally. Big tech companies will be the first to go off-grid and self supply. Smaller companies and some households will follow them off-grid as prices fall.

• Cover