How to use non-traditional business models in the energy industry.

The world of energy and business are going through interesting transitions.

The growth in renewable energy generation has caused problems for operators of traditional generation such as coal, who have struggled to compete. Nuclear power, on the other hand, has been either faced with policy challenges, such as Germany’s decision to phase out its fleet, or Japan’s decision to turn off its generators following the Fukushima disaster.

Almost every business needs electricity. It is hard to imagine what one could do without any form of power.

And power is the operative word here. For a long time, control of the electricity system was control of power, and the institutions that delivered power had power over the businesses that relied on them. This reality is shifting, especially in the UK, where we are moving from a single source of power to multiple sources. This means that power is shifting from generators to consumers.

The energy industry is becoming customer-centric

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Previously, you were supplied grid power by the local network and billed by your supplier. There was only one source of power, and it came through the wires connecting you to the local grid.

Now, you have more options. For example, you could generate some of your own power using solar panels. Or you could have a wind turbine. Alternatively, you could still get your power through the grid, but instead of having to negotiate a price with your supplier, you could agree a price with another generator and pay that price instead. Finally, if you are able to control the way in which you use power, then you could benefit from selling that flexibility to people who need it.

Because you have more options, suppliers have to compete for your business as never before. The result of this is that business models in the world of energy are going from linear models, where you have one contract with a supplier, to a customer-centric model, where many suppliers compete to give you multiple options for how you get your energy.

In this scenario, you move from being a consumer of electricity to a consumer of a bundle of power related benefits. It’s a more complicated set of choices, but there is more power in your hands than there was previously.

Suppliers recognise this and are changing the way in which they work. In 2016 E.ON announced that it would split its business into two. 40 GW of fossil-fuel fired and hydro generating assets would be moved to a new company called Uniper, while E.ON would build its business around renewables, energy efficiency and network services. It’s rival, Npower, also announced similar plans.

The energy industry is talking about the need for new business models

People in the industry talk about the need for new ways in which energy businesses need to operate – so called Non Traditional Business Models or NTBMs.

In 2015 Ofgem published a discussion paper to ask how NTBMs could impact the energy system. The responses to this paper suggested that NTBMs could achieve outcomes like:

  • Increase competition.
  • Give more value to consumers.
  • Engage consumers more.
  • Make the system more resilient.
  • Result in lower bills.
  • Reduce environmental impact.
  • Improve the quality of service.

The NTBMs that were suggested, however, were not new. They have been around in some form for a long time. Key issues included more flexible capacity from generation, storage and demand side response and more local generation. The other issues raised around diversity, innovation are a little fuzzy and good consumer protection and service is simply good business.

Ofgem’s definition of a NTBM is:

“Business models offering new products or services, or new ways of delivering these, that are different to those traditionally provided in the existing energy market. Those offering such services have diverse motivations (technological, financial, social and environmental) and ownership arrangements, and operate at various scales.”

This, slightly counter-intuitively, defines a non-traditional business model as one that is not traditionally provided in the existing market. So, it’s not that the model is not well known, it’s just that it hasn’t been tried yet – perhaps because the regulations make it hard or the structure is not understood by consumers yet.

How many business models are out there?

A business is a system. In its simplest form, you can represent a system as something that takes things in, transforms them, puts things out and changes how it does things based on feedback,

System model.png

If a business does this then a business model tries to figure out how to get value from this activity.

There are three key players in this ecosystem: producers, middlemen and consumers. Perhaps the second lot should be called middlepeople if one wants to be politically correct…

Consumers pay for everything. The way in which they pay is the business model. This article in the Harvard Business Review goes into the idea of a business model in more detail and has a number of different definitions.

It seems to me, however, that the way in which consumers pay for something is the essence of a business model.

The same article has a list taken from a book by Mark Johnson called “Seizing the White Space”, where he lists a number of forms of basic business model. This list is shown in the picture below, adapted slightly.

I think you could argue that there is a difference between how you pay and what you pay. The first is more like a model and the second more like a strategy or tactic.

That may be a little pedantic, but the picture shows the first kind in red and the second in green.

Readers may disagree – but the point is that these are some of the standard, and hence traditional models that one can identify in businesses now.

Business models.png

The models are based around the idea of the three players: producers, middlemen and consumers. The main models (in my opinion) then are:

  1. Freemium: Where you get some things for free and have to upgrade for others, like with LinkedIn.
  2. Advertising: Google has possible created this category online but this started a long time ago with newspapers that carried adverts to lower costs to consumers.
  3. Direct sales: Selling direct to consumers – the model that Dell pioneered with computers.
  4. Pay as you go: Pay for what you use based on a rate and metered usage – the standard energy company charging structure.
  5. Product to service: There are terms now like software as a service, data as a service, infrastructure as a service.
  6. Subscription: A popular model for content – magazines have done it this way for a long time.
  7. Royalties: Paying a fee to someone for what they have or for access to who they know.
  8. Brokers: Facilitating transactions between two parties.
  9. Auction: One of the oldest models around – from cattle auctions to Ebay.
  10. Fractionalization: Timeshares to NetJets – making it possible to have shared use of something.
  11. Leasing: Making it possible to use something for a time and then move on without ongoing commitment.
  12. Bartering: Exchanging something of value – for example permission to email you in exchange for useful content or a sample product.

The price strategies on the other hand have to do with trying to work with the costs of the operation. The razor / Kindle strategy used by Gillette and Amazon is to sell products such as a Razor cheaply in order to make money on large numbers of low margin products, such as razor blades or sell products such as the Kindle cheaply to make money on higher margin products such as books. Benefiting from lower costs through economies of scale, standardising products to reduce operating costs and getting paid by consumers before you have to pay suppliers are cash flow and pricing strategies – but are they business models?

Summary – more models that could be used in the energy business

Going back to the HBR article, the one that most applies to the energy business is the Pay as you go model, where you pay for what you use. There is already a lot of innovation in how much you pay, as there is a traded market in the UK and the price you get depends on how you manage your portfolio.

The idea of flexible energy systems through the use of generation, storage, demand side response and more local generation are all technological innovations rather than business models. Batteries have only recently become good enough to consider for grid scale applications. Demand side has become possible through cheaper interconnected equipment and falling networking costs. Local generation is possible through falling costs due to a push globally to create a low carbon economy.

Which means there could actually be a huge amount of potential to apply real NTBMs to the industry.

Take bartering for example. Let’s say you have a site that runs a process that generates waste heat and a site nearby that needs heat but also produces excess electricity. Perhaps there could be a trade there.

Auctions have been used in the energy business before, but perhaps they could become more innovative. Traders already trade energy, but perhaps it might be possible to make it easier for end users to put in bids for energy at certain times.

The response to Ofgem’s paper publishes a number of ideas that came back from energy market participants. They do seem, however, to be relatively traditional still, driven either by technology or a rearrangement of responsibilities between parties. Could any of the models listed above be useful as well?

Cyber security for commercial firms

Are you being hacked right now? 

Your internet connected devices, including smart energy systems, could be spying on you right now, or be controlled by others carrying out attacks around the globe.

Internet security became headline news in 2016 with reports of Russian involvement in the leaking of emails from the Democratic party during the US Presidential elections.

Just in the last 24 hours (16th March 2017), there are 5 pages of news results on google news for the search term “cyber attack”.

These include:

  • An attack on the Abta travel website affecting 43,000 individuals
  • Stolen pictures of Emma Watson
  • Russian spies charged over a hack on Yahoo affecting at least 500 million users
  • A North Korean hack on Poland’s biggest bank lobbying group ZBP
  • An hack on Licking County’s system where the attackers demanded a ransom of $30,000
  • An attack on Amnesty International and UNICEF’s twitter accounts among others in support of Turkey’s president Recep Tayyip Erdogan

In 2007, an attack on Estonia’s internet system was blamed on Russia as an act of cyberwar.

In Wales, firms have paid ransoms amounting to thousands of pounds to get access to their own data.

In these ransomware attacks, what happens is that an email is sent to employees containing a link to ransomware software. The software then encrypts everything on the company’s network. When it is done, a ransom demand pops up.

Ransomware attackers now have guides in different languages, customer service and support teams to make it easier for you to pay ransoms. The ransoms are typically paid in bitcoins, a virtually untraceable online currency.

The cost of cybercrime in the UK could be as high as £27 billion. In the US, the FBI said that ransomware attacks totalled $209 million in the first three months of 2016, up from $24 million for all of 2015, an increase of over  2,500% for the quarter.

In September 2016, Bruce Schneier, an expert on cyber security, wrote that it was possible that a large nation state like China or Russia was testing how far it could hack into the companies that run critical parts of the internet.

If you want to kill the internet or a part of it, the best way is to launch a distributed denial-of-service (DDoS) attack. This method pushes so much data at sites that they are overwhelmed and stop operating.

The attackers typically take over home computers that they have infected and use them to launch the attack.

Again, in September 2016, an attack on Dyn, an internet infrastructure company that supports dozens of major websites was launched.

What made this attack different is that the attackers used internet connected devices such as webcameras and digital video recorders. This was the first use of millions of everyday devices rather than computers to launch such an attack, turning them into an army of “botnets”.

As companies use increasing numbers of internet connected printers, phones, energy meters and control devices in their businesses, the possibility that these devices can be used to gain access to your systems or be used in a DDoS attack increases exponentially.

It is very easy to launch an attack. The software is free to download. The Dyn attack was a system called Mirai, the source code is free to access and more attackers have built the code into their software. Or you can hire groups to carry out the work for you.

If you connect a GSM router to the internet with SSH capability and monitor its traffic logs, it is likely that you will notice probing attacks trying password combinations from servers that are located in China very quickly.

According to the quarterly Verisign DDoS trends report, attacks increased by 63% in Q4 2016 over the same period in 2015.

Verisign DDoS trends report
Verisign DDoS trend report Q4 2016

49% of attacks target IT services, cloud, and SAAS companies. 32% target the public sector and 7% of attacks target financial services companies.

Why is this relevant in the energy industry? Because the feeling is that the makers of consumer devices don’t really care about internet security.

But, when the devices you are connecting to your company turn the lights on and off in a building, or the power to an MRI scanner, or an operating theatre, then making sure they can’t be attacked needs to be one of your top concerns.

In the UK, the National Cyber Security Centre (NCSC) was set up last year to improve the UK’s cyber security and cyber reliance.

This blog post by Ian Levy sets out what the NCSC is planning to do about an Active Cyber Defence (ACD) programme. Ideas include:

  • Make it harder to hijack UK machines
  • Make email harder to spoof
  • Get hosting providers to take down offending sites
  • Figure out how to help people not access bad sites
  • Create better software, better government, encourage innovation
  • Help owners and operators of critical national infrastructure

Finally… and I quote

“We’re still going to do things to demotivate our adversaries in ways that only GCHQ can do”

So… GCHQ is at cyber war…

Cyber-security and the impact for businesses and what they do is not going to go away anytime soon.

Energy Strategy for the C-Suite – article notes

Sketchnote summarizing content from the Harvard Business Review article energy strategy for the c suite
Energy Strategy for the C-Suite

How can companies use an energy strategy to unlock value for their organization? And why do so many fail to get started at all?

In their article “Energy Strategy for the C-Suite”, Andrew Winston, George Favoloro and Tim Healy look at how companies can create competitive advantage by influencing their cost structure through the choices they make about how they buy and use their energy.

Companies in sectors such as ICT, agriculture and the food industry are developing energy strategies and setting targets to cut energy and carbon in their supply chains.

Most of them, however, are doing this without an explicit framework or playbook.

The authors suggest that a systematic approach is needed.

The biggest obstacle to progress is not having a clear mandate in place. The CEO needs to lead on this.

Commitment from the top with the right resources allocated to a team is key to developing a strategy and guiding execution.

Once a team is in place, it needs to understand how the company uses energy, develop an energy and emissions reduction plan and set targets that are based on climate change science.

The team then needs to implement the plan, integrating it into operations and creating incentives for people in the company to work on energy reduction.

In particular, the people who buy energy need to work with the people who use energy to reduce risk and cost.

An important step is to record, monitor and analyse energy data. This needs to happen not just in the company’s own facilities also along the supply chain to see how it can work with suppliers and customers.

Companies need to understand their options when it comes to clean energy technology.

This includes working out which technology mix, whether generation or energy efficiency measures, will provide a least cost solution to the company, taking all costs into account.

In particular, companies need to understand how going green can increase the amount of business they do with other companies that have also committed to greening their supply chain.

A shift to local energy generation and consumption means that companies will need to engage much more with their local stakeholders and communities.

In addition, analysts are increasingly looking at how good and effective companies’ sustainability strategies are when they recommend them to investors.

Engaging employees is crucial to executing an energy strategy.

Inviting them to participate in searching for energy efficiency opportunities and communicating with them about how the company is going to meet its climate change commitments is going to cut costs and increase employee commitment to the organisation.

In summary, creating and implementing an energy strategy can unlock value for an organisation – but you have to do it the right way.

What are science based targets and how can they help with energy management?

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Science based targets are set to achieve the carbon reductions needed to limit global temperature increases to below 2 degrees

Science Based Targets are an initiative set up by WWF, the World Resources Institute, the UN Global Compact and CDP.

The group define science-based targets as follows:

“Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered “science-based” if they are in line with the level of decarbonization required to keep global temperature increase below 2 degrees Celsius compared to pre- industrial temperatures, as described in the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC AR5).”

The CDP holds and provides data on consumption and emissions from companies and cities around the world.

Some of these datasets are free to access.

For example you can view and chart Scope 2 emissions (emissions from purchased electricity, heat, steam and cooling).

This shows that major emitters include miners, steel makers and retailers.

Scope 2 emissions are important because they are caused as a result of activities that companies can control and change.

Transparent information on the level of Scope 2 emissions could cause companies to increase their purchases of renewable energy and step up energy efficiency measures.

Corporations have a clear role to play in the transition

According to the World Resources Institute:

  • The corporate sector is the world’s largest source of emissions.
  • 80% of the world’s 500 largest companies have targets in place.
  • Over 200 companies have signed up to the science based targets initiative

But the Guardian says that most global companies still don’t have any obligation to cut emissions. They do try, but what they do isn’t enough to make a real difference.

Advocates of Science Based Targets argue that the benefits of setting targets include:

  • Building long term value
  • Innovating
  • Saving money
  • Becoming more competitive
  • Being credible and influential

The pressure on companies to have some form of commitment, target and measurement and verification system is likely to continue as countries recognize the need to reduce emissions and decouple GDP growth from energy usage.

How do you set Science Based Targets?

There are 7 methods put forward by the group

1. The Sectoral Decarbonization Approach (SDA)

The SDA looks at how similar energy intensive companies can choose the lowest cost technology mix to meet their energy demand.

The SDA looks at how sectors differ from each other, the potential for reductions and how quickly each sector grows over time. A free web-based tool has been developed for companies to use but is currently offline.

2. The 3% solution

Developed by McKinsey, WWF, CDP and Point 380, US corporates would cut emissions by 3% per year overall, while individual corporates would have tailored targets using a tool called the Carbon Target Profit Calculator.

This tool tells you how much you could save if you followed its guidance.

3. BT – CSI

BT (British Telecom) have come up with a Carbon Stabilization Intensity (CSI) target in 2008 is calculated  by comparing its emissions with how much it as a corporation contributes to GDP.

The contribution to GDP is defined as “value-added”, and the CSI is measured as the emissions per unit of value added.

BT’s CSI target is to reduce CSI by 20% by 2020.

4. C-FACT

Corporate Finance Approach to Climate-Stabilizing Targets (C-FACT) is a relative target that divides a company’s greenhouse gas emissions footprint by its GDP contribution (measured by gross profit) and calculates a Carbon Intensity Reduction Rate that takes into account growth rate.

The company then commits to the target, creates an annualized pathway and works its plan.

5. CSO’s context-based carbon metric

The Center for Sustainable Organization’s (CSO) developed a context-based carbon metric along with Ben & Jerry’s in 2006.

The metric compares emissions from an organization to targets based on climate change mitigation scenarios. It works out an individual target that looks at how the organization will grow and is updated based on what others are doing and the change in global emissions over time.

6. GEVA (Greenhouse gas emissions per unit of value added)

The GEVA analysis suggests reducing greenhouses gases per unit of GDP by 5% a year to meet the 2 degree target, which then translates into a corporate target of 5% reduction in GEVA per year. This seems similar in form to the BT-CSI at first glance.

7. MARS Method

The MARS method targets Scope 1 and Scope 2 emissions, where it has direct control and selects to “overdeliver” on targets on these emissions by targeting a reduction of -100% in 2040 rather than -80% in 2050. This takes pressure off Scope 3 emissions that cover agriculture and are harder to influence.

It is also based on an absolute reduction, with the objective to reduce Mars’ emissions by 8-% from its level of around 14 MT.

What about carbon budgets in the UK?

The one method missing from the Science Based Targets initiative is the system of carbon budgets in the UK – although the difference is that the initiative targets global companies.

The Climate Change Act in the UK set a target for the country to cut emissions by at least 80% by 2050 from 1990 levels in order to limit global temperature increase to as little as possible above 2 degrees C.

The first five carbon budgets covering the period to 2032 are now set in law.

For UK companies, these are targets that guide the policies introduced by the government such as subsidies and carbon taxes.

The Climate Change Committee (CCC) in the UK has looked at how emissions can be reduced at the lowest cost, given the available technology and policy. It recommends that:

  • Energy efficiency improvements are cost effective and save money.
  • Supporting innovation in technology will increase costs in the short term but help in long term.
  • As we move towards the long-term target, we should use measures that cost less than the carbon price projected by the government if available.

The budget is set to be consistent with EU targets – but we will need to wait and see how EU and UK climate change policy evolves after Brexit.

Summary and conclusion

The Science Based Targets initiative is a significant step in the right direction with commitment from some major companies.

Implementation by some of the largest companies in the world will cause a ripple effect through their supply chains and reduce emissions far beyond their own companies.

But there are concerns over whether the voluntary targets can be met and whether companies are even reporting their carbon footprint correctly.

Finally, companies in the UK should consider whether they should align their targets with UK policy or a global initiative – and to a large extent this will depend on whether their emissions are created in the UK or internationally.