Building a Sustainable Ecosystem with Energy Partnerships

The value chain of energy production, distribution and consumption has been more or less stable for decades. Yes, there have been minor shifts in the mix of energy sources, and yes, new technologies have been developed, which have improved the efficiency of all parts of the value chain. But the value chain design has been more or less untouched since early 1900. Until now.

The changing face of the energy value chain

The energy producers are often very large capital-intensive enterprises with heavy assets producing energy. These companies are experts in managing large investment projects, such as establishing an oilfield, building a hydropower or a coal power plant. Also, these companies are doyens in operating these assets, where skillsets related to reliability and predictability are highly valued.

The distribution part of the value chain is, not unlike the producing part of the value chain, characterized by asset heavy infrastructure in one way or another. This could be oil and gas pipelines, gas stations or power grids. Also, not unlike the producers, stability and predictability are highly valued skills these enterprises possess. Hence, in many cases, the producers also distribute the energy.

The consumption part of the value chain consists of enterprises, schools, hospitals, individuals like you and I, well, basically everyone that consumes the energy. The most noticeable change in this part of the value chain through the last decades, is that it has become a lot larger and consumes more energy than ever, and the estimates prepared by Capgemini’s World Energy Market Observatory report indicates a projected growth of 25% the next 20 years. Pretty hefty, eh?

Have you braced enough for the changes coming your way?

In the next five to ten years, the energy value chain will probably see a huge change – more than it has even witnessed in the last 100 years. I can possibly list scores of reasons for that, but they can be classified under the three most important reasons:

1. Decentralization: the assets that produce energy will be based more on renewable energy, and be more distributed and closer to end consumers. In some countries, like in Germany, the trend of consumers becoming more self-supplied has lasted for quite some years already. Hence, the assets producing the energy will be smaller and have a different life cycle, from investment decisions to commissioning and operation. Technologies such as digital twin, machine learning (ML) and 5G will most likely accelerate this trend.
2. Electrification: As consumption starts to be based increasingly on renewables, an increased focus will pass over to electrification. The electric vehicles market is growing, and the first commercial electric airplane is perhaps even closer to you than you think – probably only 2-3 years away. This, combined with the decentralized production, will change the distribution aspect completely as you can both consume energy like before, and produce energy, which can be sold and distributed to others. This means that energy will flow both ways –to you as a consumer and from you as a producer. The grids will have to behave more like the internet, where logic makes the data flow through the most efficient route to the consumer.
3. Digitalization: Imagine you are charging your car at home on the energy produced on the roof of your house, driving to the airport and selling the energy to the airline who needs it to charge the airplane. And why should the water heater keep warming up the tank water even after you have had your morning shower? The products and services that enable this new way of producing and consuming energy, are as opposed to the legacy value chain, very asset light and require less capital to realize. Even though the grid owner has put huge investments in place to enable the energy to flow to your house, you could be willing to pay a decent amount to the software company who made the app that makes it possible to optimize the consumption. An increasingly larger part of the value creation will happen through value propositions on top of the assets, enabled by a connected and intelligent digital technology. The technology for solutions like this has already been in the market for a while. Why then are some of us slow on the uptake, you wonder?

Netflix, anyone?

These trends show that changes in the energy value chain are not too far away. However, changes are far more likely and pervasive than simply in the energy value chain. Just look at what’s up with the banking services, where disruptive digital actors such as Pay Pal or Klarna have attacked specific parts of the traditional value chain. Another industry which has been, and still is, undergoing such drastic change, and which, by the way, has quite a few similarities with the energy value chain, is the cable TV and broadband value chain. The value chain for cable TV was stable for 20-30 years until disruptive actors such as Netflix and HBO came along with new value propositions driven by new technology – provided as a service on top of the old assets.

Changes imply opportunities, didn’t you know?

As for the actors in the cable TV industry, the changes that the energy markets are facing, represents great threats for the incumbent actors – but these threats also represent great opportunities. Regardless of the position a company would like to take in the new value chain, one thing is for sure; the new value chain design will require a different skillset compared to the legacy value chain design.

The actors in the new value chain will still have to provide reliability and stability. At the same time, they also need to be more dynamic, be able to quickly adapt to new market conditions and a new competitive landscape. To transform the legacy skills and culture of a company, which has existed as a stable entity for decades is not easy, and that is why the ability to enter partnerships with external actors, which can quickly add value in a new value chain probably will be the most important skill of them all.

Smart sustainability depends on smart partnerships

There are numerous scientific articles and research on why strong partnerships in some value chains, create mutual benefits for the parties involved. But in plain words, you can summarize the benefits like this: shorter time to market for new products, higher pace of innovation, higher customer satisfaction, lower costs over time, shared risk and rewards – ultimately higher sustainability.

There are also documented best practice guides to show how to successfully build these partnerships and ecosystems, or supply networks, as this concept was already hailed as the way to go forward in the early days of Supply Chain theory in the 1980s. The bottom line is that in order to succeed in building partnerships, information must be shared, strategies must be aligned, and operations coordinated – in other words, a successful partnership has to be based on an implicit element of trust. And this trust does not always fit into the established scheme of doing contractual business, where an arm’s length principle (ALP) entails lengthy and formal procurement processes as the ground rule.

As a consequence of the trends affecting the energy value chain, where the time to market decreases in each business cycle, new business and operating models will arise. And with new value propositions fueled by new technology, the incumbent enterprises will have to decide their position in the new value chain, and how to create value together with partners. And if my predictions for the sector become a reality, I think the time’s ripe to develop a strategy for how partners outside the company can drive speed and agility.