WEMO Podcast: Riding the enormous wave of new market dynamics

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How market dynamics will force energy and utility companies to adapt business operations and models to an unprecedented degree.

In part 3 of our series on trends impacting the energy and utilities industry, Vito Labate welcomes Adam Malik, Digital Transformation Specialist along with Perry Stoneman of Capgemini to discuss how market dynamics will force energy and utility companies to adapt business operations and models to an unprecedented degree.

Transcript

Vito Labate: (00:05)

Hello, and welcome to our podcast series on the transformation of energy and utilities companies to better serve their customers in the digital age. My name is Vito Labate, and in this episode we’re going to continue our trends series and examine how a new wave of marketplace dynamics will cause energy and utilities players to adapt their business in ways never seen before. We’ll touch on a few areas. First, new players in the market, how companies are responding to climate change, and lastly the dominance of China in the market. To talk about all this, I’m really pleased to welcome Adam Malik, who’s a digital transformation specialist. And he’ll be joined by Capgemini’s EUC expert, Perry Stoneman. Thank you to both of you for joining me today.

Adam Malik: (00:48)

Thank you, Vito.

Perry Stoneman: (00:49)

Thank you, Vito.

Vito Labate: (00:49)

Perry, I’ll start with you. I have to admit, when I first read this trend about changing market dynamics, my first thought was that the energy and utilities market has been adapting to change for quite some time now. So what’s different in this new wave of change and why do you expect it to be so disruptive?

Perry Stoneman: (01:07)

Well, I think there you say quite some time now, but in the broader perspective of industry, utility companies, traditional players have been adapting for maybe five years, a few, maybe 10 years in the time horizon that we’re facing on the change. That’s not a long time to adapt. And when you look at solar and wind generation, wind being high linear growth and solar achieving exponential growth, I’m not so sure they’re really changing and adapting fast enough. And the fact that they aren’t changing fast enough creates an opportunity for the new players to enter the market on these exponential technologies. So yes, they are recognizing the change, but is it enough? Are they doing it quick enough? I’m not so sure. In fact, I think they still create opportunities for new players to enter the market.

Vito Labate: (02:13)

Adam, how do you respond to that? From your perspective, are there other forces that will contribute to big changes in the market other than the ones Perry mentioned?

Adam Malik: (02:22)

I think there are a number of things, and we have to bear in mind that the utilities, or the traditional utilities are a regulated industry. So one of the things that I see happening is that regulators are waking up and forcing change. I mean, in the UK it’s been running for some time, we’ve abstracted energy retail from distribution and transmission and that’s causing some interesting things, which I can hopefully come on to later. But I agree with Perry, the biggest thing is distributed energy resources. I mean, I saw a stat recently, which was reported in the Financial Times. That’s that solar has become the world’s biggest source of new electricity. It’s bigger than wind, gas, or coal in terms of new installed capacity each year.

Adam Malik: (03:14)

And what is interesting when you look at that stat and you dig into it, most of these new installs have nothing to do with the utility. They’re either independents or companies that are wanting to have renewable energy anting into power purchase agreements. The utility is not in that game at the moment, not at any scale, that’s for sure.

Adam Malik: (03:41)

The other thing that is happening is a lot of this is being driven by companies wanting for various reasons to have access to renewable power. And The Register, which is a tech journal that I read is great for headlines, and this one I liked particularly it says, Tech giants get antsy in Northern Virginia: Give us renewable power, there’s a planet to save and PR to harvest. These companies are the ones that are making the change and pushing things forward.

Adam Malik: (04:17)

And the final interesting thing is electromobility and Evs. That is going to create fundamental change and that starts pushing the link towards the old oil and gas companies. And there are some interesting things going on in that market, but I would say those are the main drivers. The other outcomes of that, like flexibility markets and energy storage, I think are just there as a result of the success of those things and looking to integrate them.

Vito Labate: (04:49)

You know, it makes me think of a previous episode, and Perry, you’ll recall this from one of our earlier podcasts. You talked about new players entering the market, including technology firms that let’s face it, have very deep pockets in addition to startup firms. So I guess the question is then what role do you think those technology firms are going to play in this changing marketplace that both you and Adam have characterized?

Perry Stoneman: (05:16)

Well, I think Adam nailed it in his previous comments. The tech giants, those with deep pockets are going to revert to self-production and consumption, and assisted by industry players that create the equipment, and the microgrids, and solar, and wind generation capabilities. So it’s just going to happen and it’s simply a fact of the tech giants wanting to make choices that are greener and make that part of their portfolio. And I think Adam’s point is spot on. It’s an unstoppable force that they’re going to move in this direction. And do the utility players, the traditional players participate or not, is kind of the question.

Vito Labate: (06:15)

Yeah, I mean Adam, to that point, there’s a number of business industry, let’s call them incumbents in this industry, but should those incumbents be afraid? How might this impact the business of those incumbents going forward do you think?

Adam Malik: (06:30)

I mean that’s a great question, and we use a single word like utility to mean a lot of different things. I think if we unpick that word just for a moment, you can divide a traditional utility into a function that retails energy, a function that distributes energy, and then perhaps but maybe to a lesser degree transmits energy. If you’re sitting on top of the network, and you’re controlling the wires and this is where an internet analogy comes in, which I know this industry dislikes, but it’s valid here. I think you’re sitting pretty. If you look at the UK market where we’ve abstracted retail from distribution and transmission, the retailers are all posting losses. I think up to 12 independent retailers went bust last year in the UK, more is going to happen, and the margins are being squeezed. It’s a race to the bottom.

Adam Malik: (07:34)

The only people that posted a real profit are companies like National Grid who run the infrastructure, who get paid for transmitting the electrons, and it’s kind of not metered I don’t think. It’s a flat part that we pay in our bill. They’re not struggling. The biggest challenge is at the retail end, is at the customer-facing end, where people are taking things into their own hands. As Perry said, if you’ve got deep enough pockets, and you want renewable energy, if you aren’t getting it from your supplier, you’re going to do a deal with someone. You do a power purchase agreement, you invest in building a wind firm, all of this is now accessible. The price points are at a place where it makes economic sense for these guys. They’re not just doing it for altruistic reasons, it really makes economic sense.

Adam Malik: (08:29)

So if I’m sitting on top of a distribution company, I’m probably going, “You know what? I’m going to do nothing.” I’m just going to enable the innovation at the edge. But if I’m at the retail end, I’d be panicking right now.

Vito Labate: (08:44)

Well, okay. So let’s look at the other side of this discussion. Climate change obviously is an important part of this conversation. Energy and utility companies, they’re increasing their focus on the obligations and regulations that climate change has put upon them. But Adam, where should they be prioritizing their efforts when it comes to climate change obligations?

Adam Malik: (09:08)

I think there’s a lot within climate change where to a degree, potentially utilities are just passengers. Like I said at the beginning, if you’re a distribution company and you really want to start getting in and making some impact in climate change, you really should be looking at jumping on or playing in the electromobility field. Because that is a real growth market and that’s where some real impact can be done.

Adam Malik: (09:45)

But really everything that I’m seeing is people want access to this renewable power. Now, if you’re a traditional utility and you’re not playing in power development or renewable power development, you don’t have an answer for that. It’s not going to work. And your climate change obligations, you won’t be part of the solution. And other people will take that solution out of your hands and make the running.

Vito Labate: (10:16)

I suppose we’ve talked about climate change requirements and clearly there are regulatory obligations imposed by local and other authorities. But Perry, there’re also those obligations that are imposed by, let’s call it the court of public opinion. From your perspective, what are customers actually expecting out of all of the change that is anticipated?

Perry Stoneman: (10:40)

I think the first point is customers still look at price in the broader perspective, and Adam talked about that early, lower cost is always better. If you have comparable pricing, then green becomes maybe a tipping factor. So I think as we start to look at the parody between renewable energy and traditional energy between microgrids and traditional distribution network, electricity, you start to get choices, alternatives that are at equivalent price points. So I think ultimately we have to keep in mind that price still is a major factor in driving consumer behavior. But as the price declines on renewable energy, then those options become more interesting.

Vito Labate: (11:37)

So I guess with all of these customer commitments that you’ve been speaking about, what’s the advice for energy and utilities companies? How do they integrate these obligations in the daily practice of their business operations? Adam, you have a view on that?

Adam Malik: (11:56)

Yeah, sure. And it’s kind of hard one to answer because as I said at the top, depending on where you are, nearly all of these companies are within sometimes fairly rigid regulatory environments. The big question is, who moves the dial? Is it the energy and the utility company or is it the regulator? And I think everybody needs to come together behind a shared set of values. If the regulator is all about pushing price down, okay that’s fine, but what are you doing for CO2 commitments and how are you putting that into place?

Adam Malik: (12:41)

If we want real innovation and real change and real movement towards climate change, then we have to make that the anchor and people have to be willing to pay a tariff or a premium for that, which doesn’t really often happen. I mean, the biggest thing I see is that Norway’s sovereign fund of 1 trillion has now been allowed to invest in independent renewable power. That’s where the big change is going to come. When that big money… And it’s the same with the Saudi fund. They are closing down their investments in oil and gas exploration. They’re closing down their investments in oil and gas, putting everything into renewables.

Vito Labate: (13:35)

That’s a good view, Adam. Thank you for that. I guess Perry, utilities are constantly making investments. So given all this change that’s coming, how do you see this affecting how utilities should be judicious about choosing where they place their bets, where they make their investments? This will all affect it, won’t it?

Perry Stoneman: (13:55)

Yeah. Adam’s commented quite a bit about it. The regulatory framework is handcuffing utilities to a degree. So what they may want to do is not necessarily what they’re allowed to do. And unfortunately for the utility, even the most progressive utilities can’t make investments the same way a private industry or tech giants can step into the market. So they do need to follow the regulatory framework, and the regulatory framework is a bit of an anchor as Adam mentioned. So I think to invest in infrastructure that is part of the regulatory framework, that is future-proof, renewable, and helps reliability to the network are sound investments. But it’s a real challenge for the utility to be able to make the kind of investments that I think they should be allowed to.

Adam Malik: (14:59)

I mean, I think to put it into context as well… Sorry Perry, if I can add to that, I was speaking to a utility in Germany who are saying that… Just to add voice to this, they’re saying, “We see all this great technology, we see all this great technology where we can in a live fashion deal with congestion on the network and so on. But our regulator rewards us based on the assets that we own and buy. And anybody who has tried to sell us something that actually goes where the sales point is, actually you could have less substations and do the same thing or be a bit more agile. They will never buy it.” The regulatory framework to unleash the utilities and innovation is the single biggest block. With most of these businesses is a single biggest point of frustration for them as well.

Vito Labate: (16:04)

Okay. Well, Adam and Perry, thank you. I’d like to get your views on China now. What would you say is driving the growing dominance of China on the planet as an energy player? Adam, let’s start with you for your reaction please.

Adam Malik: (16:18)

Well, I think the China without question is interesting. And I find it interesting from a sort of philosophical sense as well. I mean we’re talking at the top about regulatory issues and regulatory environments. China is unique in its ability to do objective orientated planning, and move the dials very, very quickly because they have a very different government regime. I’m not going to go into that, but they’re using that to their advantage. They realized that the future was in renewables. The amount of R&D that they’re investing into solar and wind is phenomenal, and it is powering their growth. It is a direct economic imperative for China to become a leader in this. Number one for their own growth, their own competitiveness on the world’s stage. Because again, you can’t just keep being the cheapest manufacturer when your energy prices are going up. That’s one driver.

Adam Malik: (17:29)

And they also realized that if they can work this out and use their own backyard as a playground, everything… I mean, I read that BYD, which is a Chinese battery manufacturer is now starting to make cars because they figured out how to get energy density within storage. They are really thinking innovatively and disruptively. And that is what I see within the impact of China, is that they will work all of this out in the backyard and then they will exactly do the same way as they’ve done with many other things, come and export that technology. There is no going away from that. They are going to be a renewable energy powerhouse. They are already in their own backyard, but they’re going to do that at a global scale.

Vito Labate: (18:20)

Perry, what about your views on China and its growing dominance?

Perry Stoneman: (18:24)

Well, it’s aligned with what Adam had to say, but if you factored down the simple components, they have manufacturing capabilities that are second to none in the world. They’re sitting on top of the rare earth metal manufacturing capabilities that dominates the world. And they’re using self-consumption as a means to insulate them from any kind of trade or tariff wars or fluctuation in demand. So they’re in a very, very good place to step into any industry, not just energy, that they want to in a dominant fashion. And they’ve chosen to go after renewable energy, electric vehicles transportation as one of the areas that’s a priority for the state.

Perry Stoneman: (19:27)

And so I think we have to understand that having agreements with China for trade is probably something that’s in the best interest of most countries in utilities going forward.

Vito Labate: (19:42)

Clearly, China is going to have a disruptive force on the market, not just energy and utilities market, but other markets as well, as you say, Perry. I guess I’d like to progress us now towards the end here of our podcast and talk a little bit about recommendations. So it sounds like energy and utilities organizations, they have a lot to contend with, both on a short term basis and in the long-term. What advice would you have for leaders of these organizations as they brace for this change? Perry, let’s start with you please.

Perry Stoneman: (20:14)

I think the fact that they control the wires and poles and assets for those utilities that do control those assets is pretty important for the future. So they need to think about partnerships and what is the new future of electricity transmission, distribution, and to some degree retail. And so watch what’s going on and establish partnerships and make sure if Google or Amazon or Walmart is moving into your neighborhood with a big data center, that you’re talking to them. It’s straight forward, it’s making sure you understand your customer or your future customer and their expectations.

Vito Labate: (20:58)

And Adam, your views. Any recommendations for energy and utility company leaders going forward?

Adam Malik: (21:05)

I’ve always found it interesting, and I’m just going to say this just to be controversial. Is we’ve got a battery manufacturer making cars. We’ve got a car manufacturer making [inaudible], why don’t we have a utility making cars? Why don’t we have a utility providing electromobility as a service? They own the network. They already own the distribution points. Companies like Shell and BP are paranoid because they’re going to lose their distribution points and all the revenue that they generate off the back of that. I think electromobility is a key vector for utilities. I mean, it’s so close to where they already play. As Perry said, they’ve already got the distribution network to provide the energy to drive those things. I mean, it’s not impossible to think of it and go, “Hang on, Shell is going to start making cars.”

Vito Labate: (22:03)

This has been great. I thank you both. Perry, Adam, I really appreciate the time here, your insights and recommendations. Very interesting topic and more to come in one of our future episodes I’m sure.

Vito Labate: (22:16)

Just for our listeners, you’ve been listening to the Capgemini WEMO podcast. The WEMO podcast is available on iTunes and Google Play, and we welcome you to leave us a comment or a rating after you’ve listened through our episodes. Be sure to subscribe to the podcast and we will have more expert insights for you in the future. In the meantime, thank you for listening, and we’ll talk again soon.

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