The pace at which digitalization is accelerating poses a major challenge for organizations in the energy sector. The momentum is unsurprising, given that 81% of the utilities executives interviewed for the 2016 CGI Global 1000 outlook revealed that transforming to become a digital enterprise is a top strategic priority.
Traditionally, the energy sector has evolved over long investment cycles that corresponded to changes in the means of energy production and distribution. Growth in the sector was incremental, driven by these investment cycles and regulatory frameworks. In recent years, extensive regulatory changes have led to increased competition, growth in renewable energy production, a focus on energy efficiency and the allocation of new responsibilities to local authorities. At the same time, policy changes have sought to maintain economic and social equilibrium, particularly for the most disadvantaged sections of society.
In the wake of COP21, planning and decision-making processes for the energy sector have accelerated to adapt to shorter timeframes, similar to how more competitive sectors such as communications, banking and retail have needed to rapidly transform due to high digital customer demands.
Is there a feeling of economic urgency in the energy industry? Certainly!
In 2016, market prices and revenues from conventional energy supply fell sharply. This happened at a time when investment was needed to maintain, support and build upstream production assets. Big energy players are now faced with new market dynamics, and are grappling to find the right business models to thrive in a complex economic scenario with several unknown factors. Operating the old way—such as expansion based only on regulatory changes, subsidies and long-term debt—is no longer viable.
Beyond just a sense of urgency, there are fundamental trends emerging due to rapid technology advances. These trends challenge the existing business models of established players, as well as their more digital, decentralized or local organizational structures, like energy networks.
The first of these trends is the "platforming" of the energy value chain. There are several characteristics of this trend. The sources of production and consumption are becoming increasingly decentralized, driven by the development of renewable energy. Smart meters are more prevalent, enabling the dissemination and exchange of raw or aggregated data. The value chain is becoming systemic, with value residing in the monetization of trade data. In addition, distribution network operators that provide flexibility, aggregation and innovative services will flourish, boosted by management API. This trend is triggering a gradual breakdown of roles and responsibilities in a historically vertically-integrated value chain. In fact, in the near future, blockchain will hasten the adoption of "peer-to-peer" models, where “prosumers” will be able to resell their surplus energy directly to third parties, without having to go through a trusted intermediary or third party.
The second trend is the central role that the end consumer is beginning to play. Consumers today are empowered; they can select and control their energy consumption based on their needs. Personalization of consumer services is shifting value gradually from upstream to downstream. This trend has repercussions for the entire energy system. Where in the past energy production was based on consumption forecasts, now consumption is progressively being controlled by the forecasts of increasingly decentralized power stations. The nature of customer relationships and the services that energy providers and their competitors will offer tomorrow is also changing. This is being driven by rapid advancements in digital and mobile technologies, and the possibility that GAFA (Google, Apple, Facebook, Amazon) may disintermediate the relationship with customers. Soon, consumers will be able to manage their energy usage from practically anywhere—the car, their workplaces, at home and even via social networks or mobile applications. Storing energy temporarily and at different locations will also play an important role in the future. In addition, we can expect to see the development of end-to-end services from decentralized production to demand-driven energy recovery become competitive.
The third trend revolves around collaborative innovation. Innovation has always been vital in asset-intensive sectors where capital investments have been very large. Now, technological breakthroughs will be the driving force of the energy sector’s transformation. Accelerating decision-making cycles and time-to-market requires agility, skill and technologies that need to be sought outside the walls of traditional organizations. While digital giants like Google, Tesla and Apple are leading the way in technological innovations, we are also seeing a myriad of startups collaborating with traditional players in the energy sector that have the advantage of large customer bases and significant volumes of data. The coming months will see new investments around renewable energy, connected buildings, CO2 management and even at the individual consumer level, further complicating the energy value chain.
In the last few months, we have seen the digitalization of the energy value chain begin. The months to come will see more digital projects and pilot programs being initiated to advance transformation goals. For the traditional players, keeping “digital” front and center is crucial, as they run the risk of technological intermediaries seizing the value around the golden triangle—decentralized energy, storage and direct access to the customer. As a generation of new, digital-born firms enters the fray, they bring innovation, a new digital-first culture and new ways of working and thinking to the sector that will also contribute to this necessary change.
CGI partners with leading energy providers around the world to help them seize new opportunities for growth amid the complex and rapid array of change outlined in this post. I welcome the opportunity to have a conversation on how we can help you lead the way.