IBM Study: Energy Provider Business Models Must Evolve with a Customer Focus

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Mar 23, 2010, 07:00 ET

ARMONK, N.Y., March 23 /PRNewswire-FirstCall/ -- IBM (NYSE: IBM) Global Business Services' Institute for Business Value today unveiled a new report entitled "Switching perspectives: Creating new business models for a changing world of energy," showing that shifts in government policy, technology and consumer demand are making the long-standing business models used by energy and utility companies obsolete.

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The study documents how a business model based on the past "grow-and-build" philosophy needs to be replaced by fresh business models that can facilitate both traditional and emerging technologies of energy generation, delivery, storage and use.

Transformations in three major areas are changing the traditional model and creating relentless pressure on energy providers: shifts in governmental policy, new technologies and changing consumer demands. With a growing emphasis on economic and job growth, climate change, and energy security, national and local governments are setting new policies to increase efficiency, conservation and renewable energy generation. Smart grids, distributed generation and storage technologies are adding complexity by causing electricity and information to move in an increasing number of directions.

Consumers are changing, too. IBM global utility consumer surveys show that utility customers want more control over their energy expenditures and environmental impact. In fact, a 2009 IBM survey entitled "Lighting the Way: Understanding the New Energy Consumer" [http://www.ibm.com/services/gbs/lightingtheway] revealed that over 90 percent of respondents from across the globe would like tools for managing their energy usage. These changes demonstrate that consumers are demanding more from their relationship with electric utility providers.

"It is time to revisit the business models that drove growth and success for the energy and utility industry the past fifty years. The value drivers will look vastly different in the next decade," said Michael Valocchi, Global Energy & Utilities Leader for IBM Global Business Services. "In this new environment, utility companies that are willing to re-evaluate their fundamental business models will be better positioned to capitalize on the emerging products, technologies and services available to their consumers."

New business models

The electric utility industry's traditional model is changing dramatically. One-way flow of energy and information is being replaced by a distributed and multi-directional flow, and the customer is becoming a more integral part. Although they are becoming more demanding, they also have much more to offer in return to utilities and other participants than simply paying for the energy they have consumed. Developments such as customer-owned renewable generation and energy storage mean that customers will be able to provide power or storage to the overall system, rather than playing a role that is limited to passively paying for energy they consume.

Another way consumers are playing a more integral role is in their access to information. Information on energy consumption patterns, consumer demographic information and even access to personal networks can all provide new revenue sources for companies – traditional energy providers, established companies from outside the energy industry, and aggressive start-ups alike - that are able to make use of this information effectively. Consumers, too, will be in a position to benefit financially by participating in home energy management programs or by generating their own power and selling it back to the utility.

Electricity providers will become like shopping malls

A smart grid with electricity and information flowing in multiple directions will provide support for interactions among various participants in the emerging electric ecosystem, facilitating the development of electric utility industry 'multisided' platforms. These platforms will link power generators, electric transmission and distribution providers, electric service providers, device manufacturers, application developers and end users (including residential, industrial, and commercial customers). Multisided businesses provide benefits to all of the interacting groups and a way for the platform provider to earn revenue from the transactions.

A shopping mall is an example of a multisided platform: manufacturers, retailers and shoppers all benefit from having a single location where they can meet and transact business. A wider variety of stores and services brings more shoppers; more shoppers bring higher sales volumes for manufacturers and lower costs for retailers (and, in theory, also lower prices for shoppers). Thus, some element of network economy is bundled into the shopping mall value proposition. The platform owner (the mall operator) extracts some of this value in the form of rent to store owners and, in some cases, service fees to shoppers.

Companies that envision being platform owners will need to have key competencies in marketing, sales and customer relationship management. That fact, combined with the ready-made set of platform participants already present in the form of existing electricity customers, puts retail electric providers (or integrated utilities' retail operations) in a good position to take on platform ownership.

For the full report see http://www-935.ibm.com/services/us/gbs/bus/html/ibv-electric-utility-innovation.html

About IBM

IBM is working with clients in nearly 60 Smart Grid engagements across emerging and mature markets. For more information about IBM's smart grid initiatives, go to http://www-03.ibm.com/press/us/en/presskit/27725.wss and http://www.ibm.com/energy