From Energy To Cloud Transition – Part 1: Headwind for Utilities

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Liberalization, energy transition and digitalization have transformed the energy market from a pony farm into a horse race.

The utilities‘ field of tension.
The energy industry is the victim of many demanding external influences. As a basic need and sometimes also a public good, every authority has an interest in a stable energy supply. The industry finds itself in the field of tension between the state and end customers like no other. The state “limits” it with a strict regulatory environment that increases competition and thus financial pressure. The end customer expects a cheap basic supply without fuss and quibble and hardly even notices most energy suppliers. Internet and electricity comparison portals enable him to change providers at any time with just a few clicks. Phenomena such as climate change or disasters such as Fukushima are fueling heated debates that are increasingly polarizing the state and end customers alike and are putting utilities under increased pressure to change.

From a pony farm to a horse race.
However, the German energy market was not always as dynamic. Two decades ago it was monopolistic and very comfortable for the participating utilities. Not only did they cover the entire value chain from generation, transmission and distribution to sales and after sales. They also did not feel the urge to align products and services to their customer needs. No wonder, the customer had little choice. After all, there were only a few players who owned the huge centralized generation plants and power lines (which are highly popular with activists).

The energy market at that time was a pony farm where you could charge the highest price for the three-legged pony.

What happened?

The market is opening up.
In the 1990s, the liberalization of the energy market gave other market participants non-discriminatory access to all steps of the energy value chain. Suddenly, utilities found themselves in competition. As a result, most of the large transmission grids were sold to foreign companies. The Energy Industry Law, which was amended in 2005, also stipulated neutral grid operation in the course of the so-called “unbundling”. Grids and sales were unbundled from each other and forced to act independently. In some companies both still work under one roof, but partly against each other – a bizarre idea.

The CO2-factories disappear.
Between 2002 and 2011, but mainly driven by the reactor catastrophe in Fukushima in 2011, the term energy transition was shaped by a series of laws and also by a deep social motivation. Suddenly, the large, centralized and fossil power plants were extremely unpopular – they were forced to be gradually converted into small, decentralized but green generation plants. Not that easy: In order to replace the 220 TWh of electricity generated by coal in Germany in 2017 alone, for example, almost 37,000 onshore wind turbines, each with 2 MW, with an assumed utilization of 3,000 hours per year, are required. For comparison: a nuclear power plant with just 1 GW of capacity operates up to 8,000 hours a year and thus represents approx. 1,300 of these wind turbines. Apart from the immense space problems and the NIMBY mentality (“Not In My Back Yard”), such a scenario would have serious consequences on a windless day.

The world is becoming digital.
With the awakening of the Internet, mobile devices and the term “Industry 4.0”, which was coined by the clever use of sensors, the era of digitalization began for energy suppliers. Suddenly, the customer was the focus of attention and there were immeasurable opportunities to optimize or expand the business. Trite energy supply without individual services was and is no longer possible. Companies around the world are thinking about how to move smartphone owners away from tinder and towards their own solutions.

Today’s energy market has become a horse race where the spectators have free entry and the jockeys have to fight for their favor.

The classical utility is dead – how to reanimate it?
Due to falling wholesale prices for electricity and gas, the utilities traditional business is additionally breaking away. In order to remain competitive, it must reinvent itself and serve the end customer with tailor-made services. But how are longstanding energy suppliers supposed to set the slow machinery in motion and prevent new players from occupying niches and displacing them to the infrastructure level? How can they be noticed in today’s completely customer-oriented market environment and react quickly to abruptly changing needs and unexpected events? And how are they to focus on new products and services, but not neglect their continued profitable core business?

Answers to these questions can be found in our 2nd part of the blog series: “Multispeed-IT” as Enabler.

In our PoV “Cloud in the energy industry – untapped potentials” we are bridging the gap from the mega trend of digitalization to a tailor-made cloud strategy for utility companies.

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