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Electricity retail business model

New business models for energy retailers

Innovations, new technologies, new entrants: As wireless changed the telecommunications industry, distributed generation and information technologies are poised to bring major disruptions to the utilities sector. Overcapacity and tariff pressures are putting conventional power generation under pressure, challenging the sector’s major players and questioning the viability of their current business models. These difficult market conditions explain the current transformation process of the energy market, towards a low-carbon and decentralized electricity generation. Energy retailers need to reinvent themselves, and start the transition towards new downstream business models, shifting from energy supplier to an information-driven energy service provider.

Energy retailers at the heart of a service environment

Figure 1 shows the current transition of the energy market. With the closing down of multiple power plants, the industry is slowly transforming from a capital intensive industry towards a more information driven service industry. In this environment, the energy retailer acts more as an enabler for the consumer and less so as a sole commodity provider. As an enabler, the energy retailer is focused on solving the needs of its consumers, which can be in the form of services or products. It is important to note the changing roles within the industry. For example, the consumers are shifting towards power producers, while at the same time aggregators and Energy Service Companies (ESCo’s) are forming around demand side management to capitalize on providing balance flexibility mechanisms or other energy contract management services.

Figure 1

Source : Sia Partners

Shaping the future utility business model

Sia Partners has identified three main business models that will lead to success in this new energy market environment. These have been classified as the ‘Pure retailer’, ‘Specialized provider’ and the ‘multiple play strategist’ that are portrayed in figure 2. Specialization is key to maximize the return on the business model.

Pure retailer

The pure retailer focuses on being a low energy cost provider to the mass market. The organization is defined by its low cost structure and minimalistic design limited to the bare minimum such as a front office, back office, pricing/marketing and sourcing department. The foundation of this structure is based on minimizing days sales outstanding, optimizing internal processes and maximizing customer acquisition through marketing actions and promotions. The objective is to reduce costs and cash through economies of scale, to offer low-priced products to the customer. These costs reductions can be further achieved through interactions with other market players. For example, an aggregator can combine multiple power demands, e.g. consumer collectives, and requests a cost effective proposal for which the pure retailer will be best positioned. Furthermore, it must be noted that the pure retailer business model can be extended to the multiple play strategist model by applying its efficient and cost effective organization into other markets.

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