Digital utility: Disrupt or be disrupted


While in California recently, Metering & Smart Energy International sales director Gerald Schreiner had a chance to speak with two SAP leaders: Peter Maier, general manager, energy and natural resources industries, based in Germany; and Henry Bailey, global vice president, utilities, industry business unit, who is resident in the United States.

What has been the most significant development in digital transformation in the sector? Why the push for digital transformation? Why now?

PM: I think in general a lot of companies are asking ‘why now?’ Its pretty simple – by 2050, we will have 10 billion people in the world, with a rising middle class. If you take this in combination with cheaper technology being available, there is only one way that demand for energy is growing. The world will remain volatile and therefore it is vital that digital transformation enables companies to predict their business moving forward.

I believe the ‘why’ has not been answered sufficiently, but if you take the economy, an overview of what is going on around the world, and the technology, this will be the trigger for big transformation projects within utilities and they will be on the customer side and also on the asset side such as the Internet of Things etc.

HB: It’s all about devices: just look at the device you are using to record this interview.

It’s amazing to think that this voice file will be easily translated into text – the whole point is that you will now be able to automatically transform this interview into an almost near final format. Your readers can download it and read it, or listen to it.

Utilities and customers have devices which allow for hyper connectivity. Apps must provide customers with information and enable interaction with the utility.

Previously customers were considered merely as ratepayers and the utility had two ways of interacting with them. The first was mostly when they posted a bill, and the second was when the customer called in with queries because they had no power or they thought their bill was too high. Both of these interactions could be perceived as negative.

Utilities need to enter into more interactive communications with customers and while that may sound simple to do, it is very difficult when you have spent the last 100 plus years as a utility in a different paradigm.

PM: And that is still the technology that is applied to today’s business. If you look at what is happening in Germany and you see the transformation of the energy market in that country, it is a huge experiment that devalues billions and trillions in assets. When renewables challenge the grid, it is eroding and challenging the business fundamentals for the utility industry. Decarbonisation or ‘low carb’ is becoming a lifestyle; when people put batteries on the outside of their houses or solar panels on their roof and all of a sudden utilities are now only a ‘stand in’ for the times when the sun doesn’t shine or the wind doesn’t blow or the battery is depleted. Utilities charge by the kilowatt hour but that business model no longer works. Digital technology, plus the disruption of the traditional utility business model, is a big driver for the digitisation of this industry – how do you generate value for the customer and shareholders in the future? These are the two big forces driving change for this industry in the future.

HB: I think the business model is changing and requires that they can no longer look at these big long-term investments such as building base load power plants. There are whole gas plants in Germany that are brand new, just been finished, and they will never operate. Investors are now saying: “What is the real value of the utility bond? Why should I increase the bond value for a high return, when the business is no longer known or predictable?”

That’s what’s happening in the financial market. You look at the devaluation of utility bonds and investment – it’s declined substantially. The first stepping point was, when natural gas prices dropped, nuclear power plants lost half their value; then in Germany with wind parks coming on line, the valuation of coal and gas plants dropped. E.ON had to separate themselves from their traditional generation arm in order to survive. These are the types of disruption that are happening overnight – no one would have predicted this three or four years ago.

Thus, it is vital to be proactive instead of reactive in order to survive. Identify opportunities or new business ventures which can help grow revenue or customer bases.

You are already seeing ‘disruptors’ being disrupted by newer business models. By way of example, Uber is being disrupted by a service called Lift.

For instance, if utilities don’t respond to customer needs, by offering solar panels on the roof, What is likely to happen? I’ll give you an example: I received an email today which said something like: “Cut your electricity bill by 80%…. zero money down… solar on your roof, get off the grid….” The result is, an influx of calls to the utility (because they are still trusted) but if the utility can’t offer a comparable service… Utilities need to prepare for the change.

Geographically, where are the biggest changes likely to happen?

PM: Where the disruption is the biggest. I see Germany taking a leading role because they have to. Their current business models are in total disarray, so they have to figure this out. What you can observe is that when a country puts a tax on storage, in order to protect this market; or if they tax solar panels as in Nevada, or limit the number of licensees like in Hawaii, it is seen as defensive and protectionist. These are likely to be the next markets to suffer.

Then there are some markets, although this is less of an issue, such as the monopoly markets; or markets with total regulation which will protect them for a while – such as parts of Asia or Russia where markets are kept stable by the political environment. However they can’t do that for too long if you take the rise of global climate legislation into account as this is going to disrupt the industry even more.

HB: You can compare it to the electricity and oil industries. I live on the east side of US, and gas is under $2 at around $1,89 a gallon and dropping. The reason for this is due to supply and demand.

In Germany, this is exhibited by the fact that they produce almost three times what they need when the weather is good and the wind is blowing and the sun is shining.

Prices actually go into the negatives on the energy exchange, which means you have to pay money to dump energy into the grid.

From a technology standpoint, what specific technologies do you think will win the day?

PM: There are two things: first take care of the customer, and then drive efficiency in the company. The digitisation is actually pretty simple – it’s about efficiency and it’s about growth. That’s it!

Utilities will look outside their core business and capitalise on their customer relationships and the customer information at their disposal and see what they can do from a general service provider perspective, to move away from the traditional model which is now so erratic and hard to predict and which in some areas has become so unprofitable. They have to look for new opportunities.