How Energy Companies Are Gambling Away Their Future
If energy suppliers want to survive in the long term, they will have to change more radically than ever before. It's not enough to rely on green electricity, cut costs, and file a lawsuit in Karlsruhe against the "Energiewende" policy of the German government. The real enemy is somewhere else.
The current core business of energy suppliers has run its course. Producing, selling, and delivering electricity and gas to customers is no longer enough. The "Energiewende" and technological progress are forcing a radical strategic reorientation of the industry toward new business areas – and so far this is only visible in a rudimentary form at best.
The need for change is fueled by increasingly complex customer needs. In the past, electricity was a "low-involvement product": it came out of the socket, and that was enough for people. Today, consumers are scrutinizing the entire supply chain and paying particular attention to the quality of energy production and use.
The bitter consequence is that anyone who still wants to exist as an energy supplier in ten years' time – and this applies not only to small companies but to large ones in particular – will have to tackle these challenges.
A half-hearted focus on cost structures and optimization of networks and plants will only help in the short term. If you want to survive and hold your own against the increasing number of competitors in the long term, you have to think more far-sightedly and, above all, act.
The battle in the energy market will be won by those who successfully transform themselves in several dimensions.
The future of energy business models lies in collaborative models with, at first glance, unrelated partners.
Think of the topic of electromobility, where car manufacturers, charging station operators, battery manufacturers, energy suppliers and fleet operators must work together. Or the opportunities in the area of smart energy, including IoT technologies, where energy generation, transport, and consumption must be optimally coordinated between all participants.
2.From Producer to Service Provider
In the future, energy suppliers must see themselves as service providers and energy consultants. The prerequisite for this is that they retain their customers through new digital services. These data channels will enable them to understand their customers increasingly well and to offer optimized, customized services. Imagine electricity prices that are calculated in real time on the basis of individual consumption patterns.
This is a Herculean task that must be accomplished. At first glance, this seems to primarily concern corporate strategies, organizations and processes. However, a closer look reveals that there is an even greater hurdle to overcome than "just" changing the daily work routine of employees. The IT landscape, which has grown over decades and forms the essential basis for business processes, must be completely renewed and reinvented.
The large difficulty is: No one in the company has an overview of the many millions of program lines in the company software. How would a human being be able to read and understand this huge "code book" that would be created if the code of all the control programs in a company were printed out? Even a smaller, regional energy supplier would come up with a stack of code paper the height of the Berlin TV tower. This is beyond the cognitive limits of any human being.
In addition, it is often precisely the important core software systems that are written in programming languages from the 1980s. These languages are no longer taught at universities. There are no appropriately trained specialists on the job market. The code can only be deciphered by a few experts - and they are usually close to retirement age. A time bomb is ticking here, quite independent of the dynamics of the "Energiewende".
A Three Step Solution
Utility companies must recognize that the fields of business of tomorrow (and actually already today) lie in digitalization. They must admit to themselves that they must transform themselves into a software company at the core. Necessary measures at the organizational level for this new self-image include radically strengthening the role of the CIO and firmly anchoring the topic of IT/digitalization at board level.
The corporation urgently needs an overview of the established IT and software landscape at its parent company and all its subsidiaries. This is the basis for replacing old software components piece by piece with innovative and flexible systems. This is where software analytics methods come in handy. Software analytics is a Big Data process in which the many millions of data from the IT departments are automatically screened, then analyzed in terms of structures and problem constellations, and presented to the CEO and board members using highly optimized visualization processes.
Finally, a cultural change must be driven within IT departments. The heavyweight development and change processes must gradually be replaced by agile, faster process models. A promising recipe for the old economy to carry this more modern thinking into the corporate culture is to ally with young companies from the new economy in pilot projects. In this way, the more agile start-up mentality can gradually find its way into the company. The start-up campus FactoryBerlin.com is a successful example of how old and new economy, but also research, can be successfully brought together. Larger energy suppliers are also trying to build up a digital innovation pipeline through their own start-up initiatives (such as Eon's Agile Accelerator, RWE's German Tech Entrepreneurship Center and others).
The challenges facing utilities in the coming years are immense. Not only is it a matter of opening up and identifying and building new, collaborative business models in an ecosystem of partners that extends beyond the industry. Rather, it is a matter of accepting that the future business areas are digital – and that the energy supplier of tomorrow is a software company.
Original article in German published in "Manager Magazin". Translated by Brandon Lewis in March 2021.