As competitive intensity increases, value drivers multiply.
While some electricity selling prices for residential customers remain regulated in France, the latest market data released by the French energy market regulator (la Commission de Regulation de l’Energie, or the CRE) reveal that competition between suppliers has intensified. This phenomenon has also been observed in other European countries like Great Britain, Flanders, and the Netherlands, where the use of regulated sales tariffs has long been abolished. The absence of “yellow” and “green” electricity tariffs for the upper end of the commercial market in France provoked an unprecedented switch in retail market suppliers at the end of 2015.
The renewal of supply-side competition is not at all surprising given recent market dynamics. Notably, the number of suppliers in each segment has increased, with new players like Ekwateur or Plum entering the market. Established French company Total has acquired Lampiris and Saft just to vie for their share of the market. Not a single month goes by without a new entrant joining the fray. Despite being a low margin business, discounts are significant. In an unparalleled series of events, green electricity tariffs, which are 10% less than regulated sales tariffs, are mushrooming.
As customers become more and more informed, they are less reluctant to switch suppliers or trust intermediation platforms across electricity and gas markets on both an individual as well as a commercial level. Inspired by the philosophy of "cheaper energy together," customers have mobilized to form community buying groups, increase their negotiating power, create economies of scale, and push energy providers to deliver lower costs. In many countries, one can observe the “remunicipalization” of the distribution and supply of electricity or gas and sometimes their integration into Smart City services. Multiple municipalities in Germany and Robin Hood Energy in the UK buy electricity and resell it at a reasonable price as part of the “Smart Cities” mission. However, the remunicipalization of electricity has not caught on in France. The creation of new autonomous districts operating microgrids maintains the necessary supply and demand synhronization and marks the advent of individual or collective self-consumption.
To conclude, let us examine the dynamics of these market shifts by looking at the mergers of established companies with leading energy services operators like Dalkia and Cofely.
So what is the transformative growth trajectory for these operators—be they entrenched players or new entrants, foreign energy players or startups from oil, construction, or retail—to fend off intense competition?
Those “drivers of change” cause market players to move in five distinct directions.
1. Regulatory Reforms: In recent times, the energy market has witnessed a flurry of regulations pertaining to the consumption of self-produced electricity, energy efficiency, consumption information for customers in a precarious situation, and basic necessity tariffs. Energy companies have to comply with the new provisions. The directives of energy consumer rights provide an opportunity for energy companies to differentiate themselves through the creation of market offers that transcend statutory requirements and benefit all consumers.
2. Best-in-Class Customer Experience: Despite considerable efforts to deliver a good customer experience, energy companies do not perform well when compared to large e-commerce sites or “born-digital” companies such as Amazon and Uber. Energy companies will have to build highly personalized and engaging customer relationships by introducing new age customer engagement channels such as chatbots and leveraging artificial intelligence or social networks.
3. Renewed, Simplified, and Innovative Offers. Similar to telecom operators, market offerings have gradually grown more complex, requiring the consumer select his or her offer and increasing overall customer service operations. A return to simplicity is essential. Yet to achieve this, suppliers have to solve a difficult equation: how can they differentiate themselves from others to surpass the competition and deliver services that provide consumers with more value for their expenditure. Since, consumers consider it normal to not pay additional costs for information about energy consumption, which services will they be willing to pay for from a supplier rather than opt out? As it is often the case, innovation will capture a customer’s attention. A broad analysis of innovations in the energy sector reveal that start-ups have raced ahead in the game and that innovation thrives on the downstream side of the value chain (network, sales, services) rather than within the upstream sector, as well as in markets with high levels of competition.
4. The Competitiveness of Suppliers: An optimized operation across the customer lifecycle—that is to say, marketing customer acquisition customer services and loyalty—is the key to supplier competitiveness. Some suppliers are even trying to become ultra low cost providers by leveraging digital technologies and simplifying offers. Cost reduction is back on the agenda of market players.
5. The Emergence of Energy Communities: Finally, energy suppliers should not overlook the collective buying power of communities, a movement that can lead to disintermediation. Instead, providers must strive to understand and address proactively the diverse needs of the community that may range from sustainability to energy affordability. How can companies profitably cater to the pooled requirements of a community? Low cost structures, competitiveness of marketing, and customer service operations are only one part of the solution. For those who do not rely on a competitive producer, energy purchasing is the second part of solution. Offer simplification may also help. Providing dedicated services or building partnerships with local communities as part of a “Smart Cities” initiative is yet another option.
Innovation is a must. But how to prioritize the actions?
In a market characterized by the continuous erosion of margins and increased shareholder pressure, there is a lot of work ahead for both established and new players. Market players must make choices in line with their individual strategies. Market players will act differently in relation to the following three scenarios:
(1) Targeting customers
(2) Capturing large market shares or focusing on niche, high-value segments
(3) Developing value-added offerings rather than only selling “only” kWh
In all cases, the capacity for disruptive innovation and the ability to introduce new products and services based on a consumer’s willingness to pay will be the engine of differentiation and business performance. The key to success lies in building innovation ecosystems and delivering integrated solutions that go beyond energy itself and extend to the areas of safety, health, and building management. The winners of this innovation-based competition will be the leaders of tomorrow. Some established suppliers have moved quickly to harness the benefits of innovation. While Engie is betting on digital, EDF has set up its laboratory Pulse studio. Energy giant Total has launched its "startup factory" for its marketing and customer service functions and organized the ventures business in a new branch of gas, renewable, and power (GRP). The future will be challenging and exciting and only the consumer can elect a winner.
Article published in Enerpresse N ° 11799, Thursday, April 6, 2017