Can energy utilities keep their customers, or will they flee the grid?


One of the great imponderables for the global electricity industry at the moment is to what extent they have a captive audience. For decades, most consumers have had no choice but to use electricity supplied through the grid, and were happy to do so.

But now that the cost of delivery of that electricity has risen so high, and cheaper alternatives are emerging, will the so-called “democratization of energy” cause a fatal blow to the incumbent’s business model?

It is a question that is, or should, be occupying the minds of the executives of the trillion-dollar electricity business, and the shareholders whose investments they manage.

After downplaying the threat of solar for several years, and all but abandoning the business, the big three retailers in Australia have recently announced that they would re-engage with distributed energy, and the technologies that go with – solar, battery storage, electric vehicles, and smart software. Part of their fear, EnergyAustralia warned a few months ago, is that customers may flee the grid.

The push back into distributed generation and new technologies is at least a recognition that business as usual will not prevail, even with the repeal of the carbon price, the push to neuter the renewable energy target, and other regulatory and tariff changes that will make new competitors less attractive.

But all accounts, at least one of Australia’s leading electricity companies have quietly built “alternative” business models that are ready to deploy when the moment is right. But will that be too late? The experience of Kodak tells us that waiting to protect the revenues of the incumbent business model is a tricky and risky business. And there are many who feel that current utilities face the same outcome.

An interesting insight was given at a Bloomberg business summit last week in Sydney, where Grant King, the CEO of Australia’s biggest energy utility, Origin Energy, questioned the need for the renewable energy target, saying it was forcing renewable energy upon consumers, when it should be a matter of choice.

King argued that before the RET, many customers took up green energy and paid more for it. That had caused wind farms to be built. He also said while recent polls showed renewables got 80 per cent support from the community, only 7% said they would pay more for them.

A subsequent panel discussion highlighted some of the conflicting views. Tony Wood, the head of energy at the Grattan Institute, a leading think tank, and incidentally an ex-Origin executive, appeared to side with King.

Wood reflected a prevailing view in the utility industry that consumers were largely apathetic and would not bother changing retailers. It is a strange view to take in an industry that for the past few years has experienced churn rates of around 24-25%. Which is to say that every year, one in four customers is motivated to vote with their feet and switch suppliers.

Right now, it's just a merry-go-round, which is bothersome but not really costly (in some states the discounts offered to such customers are subsidized by the rest, it is called retail head-room).

But what happens when new operators arrive with new technologies and different models?

Meg McDonald, the chief operating officer of the Clean Energy Finance Corporation, which is providing finance to companies approaching the market with new consumer models, such as leasing and power purchase agreements, says it is clear that consumers want greater certainty and greater control over their choices.

"I was interested in Grant’s perception – that the portion of people willing to pay extra was only 7%. I wasn’t surprised – I wouldn't tell an energy company that I was prepared to pay more.

"People come to expect that this technology provides a way of reducing rising energy costs. That is changing the consumer perception and is what is going to drive a lot of these business models.

"It will be same as mobile telephone – it will be driven by consumer choice. The moment that people want to have a given technology, because they can control it on an app on their telephone, for instance, it will spread like wildfire."

Mark Twidell, the head of SMA Australia, the local subsidiary of the world’s biggest inverter company, said that operators that can offer consumers real choice would win out, and he noted that established US companies were coming to Australia with new business models such as leasing and power purchase agreements.

"In the long run, electricity from no moving parts seems to have a great appeal," Twidell said. "It is distributed where you want it, and it is potentially the lowest cost of any other technologies … what consumers want is control of their destiny – and solar and storage offers that."

A recent survey by management consulting firm Accenture suggested that Australian consumers were less likely to defect from energy utilities to, say, "big box" retailers, because they were happy with system reliability, despite the high price they pay.

Still, Australian consumers are "energy literate", possibly because of the very high penetration of rooftop solar in households. One-third of Australians are tech savvy, interested in environmental impact, interested in off grid because of the independence, it could offer, and interested in buying or paying a premium.

"It's a great opportunity," says Greg Guthridge, Accenture’s global head of utilities. "Ultimately as much as one third of Australian consumers could go off grid, or be partially off grid."

Indeed, Accenture’s survey comes to pretty much the same conclusion as the CSIRO-led Future Grid report, which noted that 30 per cent of consumers could go off grid, and nearly on half of demand could be satisfied by on-site generation. The deciding factor on leaving the grid or not could depend on how the incumbents react, and how they price their offerings.

As Guthridge notes: “There is an open question about who is going to provide these services. It’s an opportunity for traditional or non-traditional energy providers."

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