The energy sector has not yet been conquered by a platform giant like Amazon, Spotify or Facebook, writes financial energy specialist Gerard Reid. But according to Reid there are reasons why this will happen soon. The only question is, who is going to be there first? Courtesy Carbon and Energy blog.
What platforms like Amazon, WhatsApp, Spotify and Facebook have taught us over the last few years is that size matters. Once such a business reaches a certain scale, it produces customer benefits that cannot be matched by smaller platforms. This is often described as “network effects”.
These businesses then have almost monopoly power. Their access to huge amounts of data about their customers and their value chain enables them to continuously improve the user experience and/or extract more revenue from those users which, in turn, increases their market penetration and competitive advantage.
To date, we have not seen any platform businesses in energy, but my view is that we will see them soon. All that is needed is two things: a trusted customer-facing platform and a back-office platform that combines the purchasing and trading of energy together with the management of customer demand.
The utilities who currently hold the customer relationship see them more as a ‘number’, or a metering point than a customer
One of the arguments against platforms in energy is that electricity generation and distribution are highly capital intensive. However, upon closer examination, that argument does not hold up. The internet and the wider telecommunications area are also highly capital intensive. Like electricity, telecommunications requires lots of wires as well as other hardware such as servers, routers and mobile towers. In addition, there is not one company that controls all that hardware.
What there are, are companies like Google and Facebook which use that equipment to deliver services to their customers. They may have some hardware but that is not their core competence. What they do is control the customer relationship. And this may be the real opportunity for a platform business in energy as the utilities who currently hold the customer relationship see them more as a ‘number’, or a metering point than a customer.
Given that utilities are so bad at dealing with customers this begs the question of why we have not seen Amazon or other such platform companies offer energy to their customers. There are a few reasons for this, starting with regulation which has hindered the standardization and commoditization of energy.
In many cases, these firms are not allowed to enter the market as there are state monopolies in place or regulations which prevent competition. Even where there is competition, as in most of Europe, cumbersome regulations are often stacked in favour of the incumbents.
The other issue is the financial strength that has been traditionally necessary to guarantee delivery of energy to the customer. This plays to the strengths of energy companies which tend to have strong balance sheets, power generation assets and trading relationships with key fossil fuel suppliers.
I am convinced that it is only a matter of time before global household names such as BMW, Daimler, Amazon or Google begin making the necessary acquisitions to enable them to offer such energy services to their customers
The good news is that these obstacles will soon be a thing of the past. With regards to the lack of competition amongst suppliers of energy, we are seeing the increasing liberalization of energy markets across the world as well as increasing pressure from regulators and legislators.
The other big change is renewable generation, most of which is not owned by the utilities, which in turn is creating more competition in the power market. Add to that the growing use of wholesale power markets for trading electricity, not to mention the possibilities of blockchain, which will make it easier and more transparent to buy and sell electricity. This in turn makes it possible for a whole range of new players to enter the world of electricity as well as enabling a new range of business models.
What does this all mean if you want to build a platform business in energy? You need two parts; one, a trusted brand name and cost-effective platform with an ability to treat the electricity user as a customer. The second part is the back-office platform that links the purchasing, trading and management of decentralised generation assets together with the low-cost management of customer demand.
Such a platform is known as a virtual power business and it enables not only generators to optimize their assets but also end customers to lower their energy bills. Bring the two together and you have the chance to build a global platform in electricity. And I am convinced that it is only a matter of time before global household names such as BMW, Daimler, Amazon or Google begin making the necessary acquisitions to enable them to offer such energy services to their customers.
Gerard Reid is founding partner of Alexa Capital in London, a leading corporate finance business focused on energy and mobility. He has over two decades of experience in equity research and fund management in the energy area.
This article was first published on Energy and Carbon, a blog hosted by Gerard Reid and energy journalist and advisor Gerard Wynn. It is republished here with permission.