The future of retail energy and the importance of connectivity

I’ve written before on the importance of reimagining the model for energy retailers and now I want to explore the convergence between telco and energy. I don’t mean that in the simple sense that energy retailers will sell mobile plans and vice versa. What I mean is that connectivity, as provided by telco infrastructure giants, will become fundamental to energy retailers.

To explain the point, I’ll quickly summarise my thoughts on energy retailers:

• the current model is broken. It’s broken because the vast majority of retailers make money on Volume x Price (including margin). In other words, customers use energy and get charged per unit. The more units, the more revenue and the more margin generated

• unfortunately for retailers, customers actually want to use less energy, not more. As a result, retailers rely on a desire to sell more of something that customers don’t want. The reason that customers don’t want more is: (1) it’s expensive and (2) they generally want to reduce their carbon footprint. The only question is the order of preference between 1 and 2

• the final piece of the puzzle is that customers are succeeding in using less (solar + household device efficiency) and retailers are also being squeezed by government regulations which have quite successfully capped profit margins (I don’t mean to say that success means it’s good policy, I think that the jury is still out)

• so energy retailers are grappling with demand and margins which are both structurally trending down (for different reasons)

• there’s plenty of debate that EVs will boost household usage and therefore boost revenue for retailers. I’m sure that this will, in part, be true. However, I think it’ll be a short-term blip. I wouldn't be betting the farm (if I had a farm) against the continuing improvements in energy efficiency, storage and solar. I also fully expect EVs to get more efficient, not less

The “so what?” in all of this is a lower volume, lower margin environment. The opportunity that many retailers are trying to capture is a pivot to new margin generating (or optimising) activities. An obvious opportunity is for retailers to deploy software to coordinate many disparate generating and storing assets (solar and batteries, both commercial and residential) to generate additional revenue.

This is where connectivity becomes fundamental. Imagine that you’ve just invested $500m in solar and batteries. You’ve spent a fortune on advisers to create a highly efficient, off-balance sheet securitised structure. Tick! You’re hoping to charge and discharge these assets in 5-minute intervals to participate in the wholesale market. You’ve invested in an army of developers and trading gurus to make it happen… and then the local tradie cuts an internet cable or the Wi-Fi is patchy at a critical juncture in your network.

The future energy retailer that’s orchestrating an army of relatively small-scale assets is going to need two skills. The first is obvious - technology. They’ll need to compete for the same scarce tech resources as everyone else.

The second is less obvious - connectivity. This same retailer is going to need to invest in new connectivity capabilities. That means a few things: it means people and know-how - new skills in connecting many different hardware elements that are geographically dispersed and a deep understanding in telco network infrastructure (working across fixed line and different forms of wireless technologies). The other part of ‘connectivity capability’ is quite literally building out thousands (if not hundreds of thousands) of connections, enabling them to speak to each other (in real time) and developing redundancies in case one part of the network falls over.

In solving this problem, I see a real opportunity for strong partnerships to emerge between telcos and energy retailers - creating new opportunities.

Energy retailers that embrace this opportunity will also be able to create unique customer experiences such as offering customers the ability to allow their distributed energy assets to form part of a national network that as much as about cost optimisations as it is about the environment. I think that getting the connectivity piece right will also support the many ongoing (and upcoming) investments across the industry into the latest and greatest customer management platforms.