Emerging business models in energy retail are designed to help consumers save money, and in some scenarios even earn money from the devices in their homes – flipping the traditional electricity retail model on its head.
The industry is approaching a tipping point. In deregulated markets like Australia utility companies are operating in a highly regulated market, facing increased competition from new challengers and empowered consumers who can switch providers easily online.
Incumbents in the utilities sector have benefited from a largely disengaged customer base who remained on higher-priced plans. However the industry experts Which-50 spoke to, agreed increasing power prices are encouraging consumers to take a more active approach to how they use energy and who they buy it from.
Add to that consumer attitudes influenced by concerns over climate change and grid security, a growing appetite for renewable energy sources and new smart home technology and mobility services.
Into this mix, disruptors have arrived with new business models to take advantage of these shifting market forces.
One approach to customer engagement which is gaining traction among electricity retailers large and small, as well as their customers, is demand response.
By reducing your energy usage in peak times, demand response is a bit like conserving water in a drought. Except in this case you’ll also receive some kind of financial compensation for your efforts.
“Basically you get paid to turn things off a peak times,” says Phil Ridley, Principal, Technology at consulting firm Partners in Performance.
Ridley is the former CIO of Mojo Power, an early facilitator of demand response programs which was acquired by a private equity company last year.
To break into a market dominated by three giant electricity retailers, Mojo was founded by energy industry veterans who took a different approach to pricing.
Ridley, who was also an early advisor to the electricity retailer before joining in 2015, explained that rather than charging customers a margin on top of the wholesale cost of electricity, Mojo would charge customers a fixed monthly fee and then sell energy to them at cost by averaging out the wholesale price.
“We moved away from the margin model, we didn’t have to compete on price like everyone else did,” he said. “It was a brand new digital business, all on the cloud, so our operating costs were much lower than a lot of the other competitors, meaning we didn’t need to get as high margin as them.”
The wholesale passthrough model used by Mojo Power opened up a whole lot of new ideas in the business, Ridley said, because they wasn’t trying to sell as much electricity as possible.
On February 10, 2017 Mojo trialled its first demand response program. The retailer sent customers across Victoria and New South Wales an SMS offering them $25 to reduce their energy by a certain time. 40 per cent agreed to participate within the first 30 minutes, and on average those customers reduced their energy use by 30 to 40 per cent.
Other industry insiders Which-50 spoke to revealed the major electricity retailers are all working on demand response, and we’ll see more of it, because it’s a win/win/win for retailers, consumers and the environment.
“When the grid starts getting overloaded two things happen: the price gets very, very high. It can go up to $14,500 rather than $50, so the price goes through the roof which hurts everybody. But also the grid runs out of capacity so they have to start turning things off,” Ridley explained.
Rather than the grid powering down entire buildings, which can affect food storage, controlled demand responses gives users more control over what they can afford to power down.
Powershop’s Demand Response
Australian energy retailer Powershop announced its first demand response program in late 2017. The program, called Curb Your Power, asked Victorian residential retail customers to reduce their power by 10 per cent during peak times in exchange for $10 credit. 10,000 customers opted in the first year and 13,000 the year after.
The Australian Energy Market Operator (AEMO) informs Powershop of times when the grid is nearing capacity and Powershop then notifies its customers via an app notification requesting that customers curtail their electricity usage during the event.
CEO Ed McManus says so the action taking by customers, like turning up the air conditioning a few degrees, reduces Powershop’s bill from the wholesalers.
“If the wholesale price of electricity gets really high, it makes sense for us to pay our consumers to use less electricity at that particular time. Because we are exposed to the high wholesale price [and] if our consumers use lower amount, we get a smaller bill from the electricity market. We can pass on some of those cost savings to the consumer in the form of credit on their bill.”
Demand response has also the backing of regulators. Powershop’s program is part of a trial run by AEMO and the Australian Renewable Energy Agency (ARENA) which partly funded the program.
McManus further explained the appeal of demand response in a market where wholesale prices only peak to the absolute maximum, usually, only for a few hours every summer. The alternative is building a new power station that’s only required a few hours a year.
“Demand response is definitely going to be a big part of the future,” McManus said.
Amber Electric proposes a model for daily demand response
The demand response mechanism is opening up new business models for disruptive energy retailers like Amber Electric.
Co-founders Chris Thompson and Dan Adams wanted to design a business model that would encourage customers to shift their usage to the times when cheap renewables were generating power.
They achieve this by charging customers $10 a month and passing through the wholesale cost of the electricity households use, which varies every 30 minutes, without any margin.
Amber Electric launched with its MVP a year ago with a small number of customers in South Australia and New South Wales. They’ve recently raised capital and are now looking to scale up the business beyond the initial customer group.
So, how does it work?
Co-CEO Dan Adams says even without taking an active involvement in their energy usage, customers’ bills still tend to be cheaper over a year by removing margins applied by traditional retailers.
“Even if you don’t do anything, most customers most of the time are actually just significantly better off with wholesale pricing. You pay quite a price premium to get a fixed price with most other retailers, because they have a whole bunch of hedging costs that they need to cover to give customers that fixed price,” Adams told Which-50.
“We do have a little bit more variability month-to-month, but over the year the vast majority of customers are better off with wholesale pricing.”
Alongside a smart meter and app, Amber customers have the ability to optimise their energy usage to times when the wholesale price is lowest.
Adams describes this as “manual demand response.” By consulting the app customers can see what the wholesale price is, what percentage of renewables are in the grid and what the forecast is for the rest of the day to choose the cheapest time to run the washing machine or dryer.
“There are actually times when the price is negative, and we will actually pay you to run your washing machine or dryer, which people find hard to believe.”
According to Adams, the biggest test of the model to date was in South Australia in January this year.
“On January 24, there was a price spike and the market went to the maximum price for five hours. During that price spike we sent out messages to our customers saying ‘try to reduce your usage today because wholesale prices are high.’ We found about 50 per cent of our customers engaged in some sort of demand response on that day.”
The risk with passing on wholesale cost of electricity is customers could get stung by using power at peak times when the price fluctuates dramatically.
For example in New Zealand customers of Flick Electric, which offers power at wholesale prices, weathered a period of sustained high gas prices due to supply issues last year, with local media reporting “prices were driven by a continued outage at a gas plant and lower than usual rainfall, which meant there was lower output from the hydro lakes.”
To mitigate that risk of price volatility in the wholesale market Amber has capped the maximum rate customers will pay over a month.
For example in South Australia Amber customers have been averaging 27 cents a kilowatt hour, but the company has capped the price at 40 cents a kilowatt hour.
Evolving to Automated Demand Response
The next evolution of Amber Electric’s business model is automating the demand response process by remotely switching off devices when prices are high and optimising energy usage to times when the sun is shining, the wind is blowing and there’s an abundance of renewable energy in the grid.
“Automatically optimising your household battery, your electric vehicle charger, your electric hot water system or your pool pump to automatically shift your usage to the times that cheap renewables are generating, can save you hundreds, if not thousands of dollars a year,” Adams says.
The company is building the integrations and technology to optimise the device usage, taking advantage of the hardware consumers already have in their homes.
“That’s when it really becomes a mass market opportunity,” Adams said. “When you can automatically shift the times those devices use power to cheap renewable times it becomes a very seamless experience. For customers, they don’t have to think about it, it just all happens like magic in the background. And that’s really the vision of where we want to get to.”
Switching to services
Currently Amber Electric’s revenue comes from the $10 per month service fee it charges customers, but the company looking to generate further revenue by providing services to help customers increase their savings.
This move to services was also echoed by Ridley, who argued people don’t just want power – they want the data and the tools to help them manage it better.
“Energy is moving into services now, so it’s not just selling you electricity, it’s selling you services to make it more effective for you and help you make money out of the assets you have in your home,” he said.
Powershop CEO Ed McManus says offering their customers information about their usage helps drive brand engagement and loyalty.
“We would much prefer to have a customer who doesn’t use much power, but stays with us a long time than a customer who uses lots of power, but only spends a short time,” he said.
“That is that it’s just a simple mathematics, a loyal customer is much more valuable.”
The Australian energy retailer has also taken a different approach to the traditional retail model by giving customers the option to pre-pay or post-pay for their electricity. Offering a lower rate on pre-paying for power is the hook to get people into the shop, where consumers can discover usage tools, McManus said.
“If you can understand that information and use it to spot anomalies or make some small changes, that’s really a better way to save money than actually getting a particular discount,” McManus said.
“Using less power is good for the environment and good for the hip pocket.”
Better bills from incumbents
While it’s more risky for the large retailers to charge for electricity at wholesale prices, they are making moves towards developing apps to help consumers better understand their power usage and prevent bill shock.
Martin Richards, Senior Director – Energy Industry Strategy at OpenText, said utility companies have a limited ability to make changes to pricing, and his clients believe customer support and service will play a more important role in determining switching behaviour.
“Utility companies have been using smart meters to collect customer data for a few years now. The more interesting aspect is how they use this data to better inform their customers and provide feedback on their energy use,” Richards said.
“Providing a monthly bill with usage analytics is one way to inform but this has an inherent lag in the system as it only looks back. New apps available now allow customers to see their energy usage in real time and to make adjustments to better conserve energy and spend less.”
For example, apps can show current energy use based on each system within a property. That can include air conditioning, refrigeration, or heating. An app then compare this to previous use or to compare to other properties in a region as well as provide controls to allow the customer to adjust their systems remotely.
For example OpenText, a customer experience management systems vendor, is working with a utility company in the US with 1.2 million electricity customers and 800,000 natural gas customers across a 6,000 sq mile region.
“Although it operates in a regulated environment, this company decided it needed to improve its relationship with its customers and to try to reduce servicing costs. Initially they focused on improving the quality of the monthly bill as they believed it would provide the biggest impact in customer experience,” Richards said.
The company redesigned the monthly bill, introducing colour coding, summarisation and usage analytics, using Document Presentment for SAP, an OpenText product.
Richards said the new bill received excellent feedback from customers and has resulted in a significant reduction in service calls because it was easier to understand. The company is now developing an app to present the information in real time.
The Consumer Data Right & frictionless switching
The ACCC has recommended passing the consumer data right (CDR) legislation which would further empower consumers to switch suppliers and drive competition in the retail energy market.
The CDR, which underpins Australia’s open banking legislation, will mandate that electricity usage data is made available to consumers and to any agents the consumer has given consent to who can act on their behalf.
“This will then enable consumers themselves to make better use of data and present opportunities for innovation by third parties providing services to consumers in finding the best electricity offer,” sates the 2018 ACCC report onto the energy market.
“It should also drive efficiencies in the market more generally as switching becomes more ‘frictionless’ and consumers are more readily able to identify and move to the best offers.”
This mechanism, as well as the ongoing innovation and competitive in the market, means consumers will have a very different relationship and value exchange with their energy provider in the not-too-distant future.