At a time of rapid global disruption across all industries, Australia’s utilities sector faces quite a specific risk. It needs to avoid falling victim to “the telco trap”.
Around the world telecommunications companies invested billions in the hard, physical infrastructure required to deliver services. Then they watched as new global technology insurgents stepped in to capture all the value by building new business models on top of that infrastructure often at their expense.
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There’s a reason why Whatsapp was worth $19 billion to Mark Zuckerberg, after all.
Disruption has begun in the utilities industry and many experts believe a similar outcome is possible.
Research conducted by Which-50’s own Digital Intelligence Unit bears out the argument that it is no longer a case of if, but when for disruption in the Australian industry. A survey of local industry executives, commissioned by OpenText, revealed the majority expect the most disruption to occur in the next five years and the disturbance will require a significant culture change.
Studies from Gartner shows digital is now the number one priority for CIOs in the industry and over a third of organisations in the sector moved to the scaling phase of their digital initiatives this year, more than double the scaling rate of the previous year.
Yet most of those initiatives in Australia today are really about reforming the way utilities work, rather than recasting the nature of the business, which is what real disruption will entail.
According to Gartner analyst Zarko Sumic, digital initiatives to improve operations do not equal digital transformation.
Many organisations are using emerging technology like drones and IoT to better monitor and maintain their existing asset. These digital technologies provide a rich set of data and insights used to improve the management of the billions of dollars worth of infrastructure.
But, Sumic says, this approach is not “reinventing the industry” nor is it digital transformation.
That only occurs when these initiatives unlock new business models, according to Sumic. He argues digital technology unlocks completely new ways of doing business, where lines between generators and consumers blur and commodities give way to services.
Stuart White, UTS Professor and Director of the Institute for Sustainable Futures, agrees the biggest impact will come from the new business models, rather than asset optimisation. White also has little doubt the industry is under pressure.
“It’s being disrupted and the question is how that will shake out,” White told Which-50.
The eventual winners will be the ones who fundamentally rethink the utilities business model and, like other industries, the possibility of a “platformisation” is very real, according to White.
“Utilities must recognise they shouldn’t be in the business of selling a low cost commodity, they should be in the business of saying what does the customer want and how can we best provide it?”
White’s point – consumers don’t care about the commodity, they care about the services or experiences it creates.
“Customers don’t want water. What they want are clean clothes, nice landscapes, sanitation – all of the things water is used for in plumbing systems. A sensible modern utility would say ‘how do we best provide those services and what tech and systems do we need to do that.”
That demand is best seen in the pain points of utilities where digital solutions are creating new business models, according to White.
“It’s sort of an inevitable consequence, which is in a sense an ‘uberisation’.
“Uber was only possible because we had the tech and somebody realised there was a pain point, which was people wanted to get from A to B and they weren’t happy with the existing service.”
But what does the Uber of utilities look like? White suggests, in the future utilities companies could become service providers and, like Uber, contract out much of the labour. White uses the example of an airport or shopping centre where owners will happily pay service providers to remove pain points of plumbing failures, freeing them to focus on its core business. And as data and analytics put a dollar figure on the cost of those pain points, the appeal increases further still, White said.
“There’s clearly a demand there but the tech hasn’t been able to enable the solutions that could come.”
Rates of change
However, while a good example of the possibilities of further digitisation, the disruption of the water sector pales in comparison to what the power sector is already experiencing.
The power sector is particularly ripe for disruption, and indeed the changes are already well underway, because of the ease of integrating digital technology and the rise of electricity “prosumers” – consumers producing their own power and feeding it back into the grid.
Smart power metres are much easier to install and monitor than the equivalent technology in the water and gas sector. There’s also considerably less competition in the generation and supply of water and gas meaning consumer choice is limited.
Experts Which-50 spoke suggested the gap in digital maturity between power and water could be as much as 15 years, with gas even further behind and in some instances being replaced by renewable power.
And while the power sector is leading the way, changes being envisioned remain a radical departure from traditional operations in an industry not typically renowned for its speed or innovation.
But it is a future that is becoming increasingly viable.
For example, blockchain technology can be used to decentralise energy generation and distribution, allowing prosumers to contribute to the supply or exchange energy amongst themselves, thereby lessening the reliance on traditional generators and retailers.
In fact this is already happening. Perth-based company Power Ledger is a blockchain based peer-to-peer energy trading platform that allows prosumers to trade their surplus energy. But Power Ledger has also integrated its technology with traditional electricity infrastructure and is now focusing on commercialisation and scale.
Elsewhere, software firm Greensync has launched its decentralised energy exchange (DeX), a platform connecting millions of distributed energy resources and virtual power plants to existing markets, including the wholesale market.
The two companies exemplify the potential of digital technology and the subsequent force on the industry. But there are other forces too, according to Sumic.
Where is the disruption is coming from?
Gartner’s Sumic argues the disruptive forces in the power sector are largely coming from “the edge of the grid” rather than from within.
Prosumers generating their own power and contributing to the grid, smart metres, IoT and a host of new players have added complexity and are forcing a fundamental rethink of the entire industry, according to Sumic
“The existing business model which has been historically widely accepted as the best way of provisioning energy to the customer is being challenged because it is not sustainable,” Sumic told Which-50.
According to him, there are four broad forces disrupting utilities. Firstly decarbonisation. Notwithstanding Australia’s political missteps on climate change, the push is on to lower the emissions of energy generation, as much as 20 per cent of total CO2 emissions according to Sumic.
Secondly, digitisation has unlocked a wealth of utility data and spawned new hardware and software solutions. While efficiency and innovation has always been critical, digitisation has provided the tools to achieve it at the scale required by utilities organisations.
Thirdly, and closely linked with digitisation, is decentralisation. Energy and water generation at a consumer level not only removes the need for grid access in many cases, it has also unlocks new contributors and complexity.
Finally, democratisation through technology. The ability for users to now generate, store and even sell their own utilities on digital platforms like blockchain has shifted the power once concentrated with traditional players.
Slow to innovate
A consistent message emerged from those in the industry: We struggle to innovate. Executives and analysts suggested the tight budgets and regulatory pressure typical of the industry meant often little was left over for innovation, and any that is typically goes into optimising assets rather than the new business models many view as the future of utilities.
“I think a lot of the innovation in the industry will come from the new group of companies because I think the incumbents will be grappling with the regulatory changes and having to update their processes and systems,” says Tanya Graham, chief transformation officer of Alinta Energy.
Graham explained that unlike the industry insurgents leveraging digital technology, many incumbents are hamstrung by regulators and compliance. She used the example of the upcoming five minute settlement requirement where retailers must be able to adjust prices every five minutes rather than the current interval of 30 minutes.
“That then has a whole knock on effect across your wholesale trading platform, your retail market and all the support functions around things like finance,” Graham said.
“Companies are not focusing on innovation, so it’s ripe for new organisations to come in and start from scratch.”
Jason Scoble, a Partner at executive recruiting firm Derwent Executive specialising in infrastructure, property and utilities, agrees the pressure to innovate sits awkwardly with the limited budgets the organisations have to work with.
With regulators often setting prices for periods as long as five years and assets that are valued in the billions, often little is left over for digital initiatives, despite access to digital solutions improving, according to Scoble.
“Fundamentally there aren’t deep pockets or big budgets to do something interesting,” Scoble said of the established organisations.
Changes at the top
Scoble told Which-50 the privatisation of many utility assets has created new pressure from the new owners, usually large private equity firms.
“In that state owned environment they probably didn’t use technology to their best advantage,” Scoble told Which-50.
“They’ve got new owners now that are really looking to get the best out of their asset and drive revenue and that’s where technology is also coming into play.”
Currently placing digital and IT executives for a state water retailer, Scoble said his utilities clients are increasingly looking for digital capabilities and the ability to manage change, a far cry from the industry’s relatively steady history.
“It’s not just an ICT systems play now. They’re looking to actually digitalise a very asset intensive businesses. But they’re looking for people that have either the digital experience or can get a better return for that money within that tight budget.”
That has led board to ask for “technologists” to fill traditional CIO roles.
“With that growth in technology they are looking for people with a deep understanding of technology, or technologists, that can actually utilise technology better in their business,” Scoble said.
“It is technologist rather than traditional CIOs that are pushing the boundaries of what has been predominantly a very stable industry. But it’s the technologists that can look at doing something quicker, differently and probably at a lower cost.”
For those leading digital transformation projects, they can expect considerable challenges. The industry is already “quite a step behind” because of its regulated assets and a relatively stable history of providing essential services, Scoble said.
A cultural change to accompany the technology will be needed, a requirement well understood by the industry. Research from the Which-50 Digital Intelligence Unit found nearly 70 per cent of those in the industry agreed dramatic change is required to reflect changing conditions.
The shift is unsurprising for UTS’s White, who does not expect change to be quick.
“They’ve got big expensive assets but also a culture of institutional inertia,” he said.
“Moving to a world in which they’re offering services, they are focused on customers, their needs, they’re focused on different technical skills like digitisation, is slow.”
The ‘second coming’ of customers
The utilities sector now faces new owners, new leaders and, Gartner’s Sumic says, new customers. In the past, the customer was the regulator, which acted as a “market proxy”, with little need to provide customer experience, according to Sumic.
“In the past they didn’t have a customer, they had captive rate payers,” Sumic said.
“So if you have captive rate payers you don’t really have to pay too much attention to [customer experience]. In a sense you don’t need to understand them, you need to know how much energy or water or gas they use and where to send the bill and did they pay. It’s simply what the business required.
“Awareness of the customer came as the market started to deregulate. Utilities woke up and said ‘hey this customer is somebody that can go somewhere else so we need to know how to retain them. We need to know what is their propensity to buy, we need to know what they want to buy.’”
And while the role of the customer will likely change further still, Sumic says, their importance won’t be in question.
“Utilities are now realising that the industry is going to change [but] they don’t know how. One thing they know is, regardless of the end state, the importance of the customer will be significant.”
Australian energy retailer Powershop, the country’s greenest energy retailer according to Greenpeace, offsets its own and customers carbon emissions.
But just as important as its carbon neutrality, is data and customer experience, according to Powershop Australia chief customer officer, Catherine Anderson.
“We really saw this opportunity of making data available to customers so they could be in control of their power,” Anderson told Which-50.
“If you’ve got a smart meter at your house, for example, we can see your 30 minute energy usage and our app shows that to you.”
Empowering customers with data is a relatively new concept in utilities, according to Anderson, who says Powershop was one of the first to launch a consumer facing energy app. And while customers appreciate the transparency it also opens up more agile operations, Anderson said.
Last year Powershop trialled an option for customers to opt out of energy consumption during peak times in the summer, when the grid is most strained. The company sends requests via its app or email and In exchange for delaying a load of washing or adjusting the air conditioner customers received power credits.
“Customers are able to play a role in taking pressure of the grid, they’re financially rewarded for that as well,” Anderson said.
Anderson believes the level of experience requires an organisation wide belief in CX and it starts at the top. She said Powershop’s executives share a roster to respond to customer’s social media queries every weekend, bringing that perspective to the business come Monday morning.
“You’ve got this executive team constantly listening to what customers need, what’s challenging for them, and coming back in on a Monday and saying ‘lets change this’,” Anderson said.
“Without customers we’re not going to exist. In the end, customer service and helping customers, being transparent, it’s the responsibility of everyone in this office.”
Other retailers are catching on the importance of customer experience, Anderson says. “It’s definitely getting better. We’re starting to notice a lot of change, especially in the different way energy retailers talk about their approach to customers or different initiatives that they’re bringing to market.”
“In the past couple of years there’s been a really dramatic shift. Hopefully in the end, consumers are the winner.”