As meters get smarter, who gets the power?

5 insights for executives

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As the UK Government’s smart metering mandate ramps up, large energy retailers can’t just focus on the present without confronting the future.

As the Managing Director of a major UK energy retailer, Susan takes a deep breath as she looks over next year’s budget. To comply with the Government’s mandated smart meter rollout, her company is spending more and more on infrastructure and installation – and as those costs continue to climb, investment into the business’ growth areas is being strained or even diverted.

Meanwhile, more nimble competitors, staffed with digitally savvy workers, are planning how to capitalise on all the new smart meter offerings, and poach her customers.

As she reviews the spiralling cost of her company’s smart meter rollout over the next five years, she recalls a case study from her MBA programme, concerning a similar rollout in the UK: fibre broadband. The leading companies at that time never got to capitalise on the world they helped create, as the sheer cost of investment forced some into bankruptcy, and others to merge in order to survive.

Could history be repeating itself?

Susan is fictional, but this scenario is all too real today for large UK energy retailers, which are at risk of footing the smart meter bill while the next generation of retailers is poised to flourish in their place.

But it’s not that one sided: already the new players are feeling the pain of evolving their business model to adapt to a smart-enabled world. It’s all to play for!

Read our 5 insights for executives:

 

1 Large retailers are carrying the burden for the bulk of the rollout, yet all retailers face challenges too

The UK Government has mandated that every home should have a smart meter by 2020 – a project expected to cost approximately £12 billion.

For large retailers, the cost of deploying new smart infrastructure can be steep and potentially unsustainable, much like the broadband rollout.

They also have inherent complexity in their business as they’ve continued to adapt legacy processes and procedures to accommodate large swathes of regulation over the years. Now, adding smart metering has driven the need for large-scale IT change programmes, sapping investment from future growth opportunities.

For new entrants, the situation is slightly different, but no less challenging.

While they focus on customer acquisition and retention, they too must adapt their business to cope with an increasingly complex market, and evolving processes and systems to keep up with the digitisation of power.

2 Installations are set to intensify further and create commercial tension in your budget

The true cost of smart deployment is about to hit every retailer as the effort to meet the 2020 mandate scales significantly. These costs will place increasing pressure on discretionary investment in other areas, likely peaking in 2017 and 2018.

Large retailers could find themselves submerged in the present with no eye toward the future. And their business models are still primarily driven by volumes, in which a large fixed cost base needs large numbers of customers to stay profitable.

Meanwhile, new entrants, founded with more of a tech and data focus, aren’t saddled with the same cost base, but face their own challenge of creating new propositions for customers and delivering them consistently.

3 Keep Smart 3.0 top of mind as new market dynamics gain momentum

New players continue to rapidly gain market share.

If Smart 1.0 was the learning phase before mass rollout, and Smart 2.0 is the deployment phase, are retailers – and particularly the large players – focusing enough on Smart 3.0: the role and the shape of their business in a smart-enabled world?

New market entrants have the potential to exploit the new world of smart more quickly and effectively to entice customers and unlock the benefits of a smart network – and destroy the past two decades’ volume-based business model.

4 Don’t just rethink traditional approaches on costs and benefits – rethink your business

Large retailers must simultaneously deploy smart, and radically transform their business model to capitalise on it – and that requires radically different mindsets beyond cost efficiency and benefits realisation. Your effort can’t just be a single programme with a stand-alone business case.

1. Instill capital programme rigour. Many smart programmes are still not being run with the discipline of a £1b capital programme. Installation costs are not universally measured and tracked, nor are key cost drivers measured accurately enough to provide certainty on total deployment cost.

2. Capitalise on advancements in digital. It doesn’t begin and end with the meters themselves. For example, machine learning can make it easier to automate processing smart meter events, alerts and alarms. And rather than physical “in the field” quality assurance teams reviewing installation quality, digital applications can provide greater assurance at a fraction of the cost.

3. Define the new Smart 3.0 business model. Are you defining a new way of working, or identifying how to adapt your current processes and systems to work in a smart-enabled world? Give people the freedom to design what the business should look like in the future, unconstrained.

4. Disrupt yourself. That may sound silly, but the stakes are no joke: rather than transform your existing business, start thinking from a blank sheet of paper. How do you best encourage innovation and R&D? What legacy parts of your business are (or should) be left behind? Who is better at what you currently do that you can partner with in the future?

5 Energy retailers must confront today’s rollout challenges with an eye toward tomorrow

It’s imperative to identify, experiment and implement cost-efficient and operationally effective approaches to the smart rollout.

But never let what’s right in front of you obscure what’s on the horizon. Companies like Susan’s are paying to build a future that they will struggle to profit from unless they radically rethink how they do business.

The choices ahead may be difficult, but the market is being disrupted with or without your input: what matters is whether you guide your own destiny.

Looking at your budgets, you may feel discouraged, like Susan. But the time to act is right now. When you’re stuck in the middle of the ocean, with hard work in front of you regardless of whether you turn back or move forward, it’s no time to just tread water.