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Why the Energy Industry Needs a Reset - Now

By Kildahl, Jørgen 22. March 2018

Reset.jpgWe stand at a crossroads. All industries are being affected by the fourth industrial revolution - powered by new computer technology. The energy industry has in addition already been affected by a radical restructuring, driven by fundamental changes in the market environment.

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Compoundingly, a technological revolution is now underway. For the industry, however, new technological solutions are not only a threat. New solutions are fueling the restructuring process and making it possible for the players to reposition themselves and in some cases, even reinvent themselves.  

The changes are hitting the energy industry hard. It is no coincidence that “disruption” was named the “business word of the year” in Germany in 2015, or that the disruption theme is setting agendas both nationally and internationally. In my mind we are not just facing an industrial revolution, but just as much a cultural revolution. Rapid innovation in a number of new knowledge areas, decentralized solutions, and more knowledge than capital-driven value creation also require new organizational structures. Value chains are being fragmented and barriers to entry are collapsing. New technology is radically changing the way companies are interacting, both internally and externally. New business models are spurring new ways of planning, decision-making and, consequently, organizational setup.

Energy companies are in a period were existential choices must be made: Either to surrender or radically change.

Read also: Why AI and Machine Learning are Essential for Next Gen Utilities

Drivers of change 

There are several interdependent factors at play beyond the technological revolution itself. Essentially, there are two groups of trends driving today’s market changes.

  • Technology and new entrants
  • Stakeholders: Politicians, regulators, and customers

Until now, the energy sector has been a stable industry characterized by long-term horizons and reasonable returns. This was not only due to framework conditions, but also huge barriers to entry related to capital, systems and knowledge. These barriers have now more or less eroded.

Policies and regulations also have tremendous power. Several development trends in technology are fully or partly driven by political decisions and agreements, regulations, as well as by new players and, not least; the customers. Together this have made major impact on energy prices, system charges, and taxes.

There is also an interdependence between these factors. The solar industry is an example of this. Where would the PV-industry be today without the huge German government funded initiatives? There are now 1.6 million solar power installations with a total capacity of 42,800 MW in Germany. PV investment cost has been reduced by more than 80% since 2006, and PV has reached grid parity in many markets. 10-15 years ago, the incumbents in Europe did not take solar power, wind power, and batteries seriously. Many thought solar and wind investors would only factor in sun and wind hours. That proved to be wrong. In 2016, 90% of new power in Europe was renewable and growth globally is accelerating rapidly. Moreover there is a new wave coming. New players from other industries are entering the arena using new technology. Google’s product, Nest, is an example. 

Read also: Making Utility Infrastructure Operations More Efficient 

Why do organizations exist? 

It may be appropriate to reflect on this question. In 1991, Ronald Coase, won the Nobel Prize in Economic Sciences for his work to answer this. He identified transaction costs as a contributor to the formation of organizations. Put another way: without transaction costs there is no need for organizations, as it would then be cheaper to find the products we need directly in the market without intermediaries. What is new technology doing to transaction costs in the energy industry? They are being dramatically reduced. Traditional structures become too costly and incumbents will have to radically change their business models and organizations in order to stay competitive. In addition commodity prices are going down, and there is little reason to believe that this cycle is comparable to what we have seen in the past. This will not simply pass. Embracing this new environment will require fundamental changes: Surgery, not cosmetics.

Today, there is a completely different dynamic and volatility in the market. It is challenging, but it is also opening new business opportunities. It is going to be a tough race for the entire industry. There is no doubt that changes are coming. The question is when it will affect you and your organization with full force. Personally, I do not think it will take long.

That is why the energy industry needs a “Reset” now.

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Kildahl, Jørgen's photo

By: Kildahl, Jørgen

Jørgen is Chairman of the Board at eSmart Systems. He has extensive international experience from the energy industry as former member of Board of Management at E.ON SE (2010 - 2015), and Statkraft (1999 - 2010).

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