Last year, Dr Jeffrey Hardy took a career break from his role as Head of Sustainable Energy Futures at Ofgem and joined the Grantham Institute as a Senior Research Fellow. He has been imagining a future where your relationship with your energy company is different to the present, and why new business models must put customers in the driving seat of the low-carbon transformation. Here he describes the results of the study, funded by Imperial’s Economic and Social Research Council (ESRC) Impact Acceleration Account, which was presented at a breakfast briefing in June.
Why is our energy system changing?
Our energy system – vital for keeping us warm, fed, entertained, mobile and productive – is changing. It is becoming cleaner and smarter, driven by environmental law, an explosion of data and rapid technological development.
In the future, peoples’ role as relatively passive consumers may end. This is because a future low-carbon energy system is more efficient and affordable if people consume energy when it is available, for instance, when the sun is shining and the wind blowing. There are also increasing opportunities for people and communities to take more control over energy, driven by the falling costs of technologies, like solar photovoltaic panels.
The cheapest future energy system is a smart and efficient one – the National Infrastructure Commission thinks a smart power system, where demand follows available supply, could save consumers up to £8 billion a year by 2030. This is a business opportunity for existing and new energy companies.
My study has centred on two potential future energy business models that put people or communities in control of energy. One model, Third Party Control, is where a company engages on your behalf in the energy system. The other model, Shared Economy, is where communities have come together to own and operate their local energy system.
During the research, energy stakeholders examined two futures, in which one or the other business model has dominated the market. They were asked “what would have to happen for this to be true?” Their answers give insight into what is driving new business models; the issues they could face; and the decisions that can be taken to enable new businesses to thrive. This graphic is a summary of the findings.
How can these smart, clean, customer-led energy models work?
Markets must enable business model innovation: New business models have the potential to unlock new customer and energy systems benefits, so it is important that organisations and businesses are able to bring these innovative propositions to market. This means creating space in industry regulations for this to happen, without accidently creating the Wild West in which consumer protection is weakened. Ofgem, the energy regulator, has recently started this process through its innovation link and regulatory sandbox.
Smart devices and data must be interoperable and secure: Data and smart devices are essential to deliver an efficient and smart energy system because they enable home devices to respond to energy system needs. For example, when data reveals the energy system is under stress and prices are high, your fridge could turn off for a bit (without spoiling your food!), thus saving you money and assisting the wider system. As such, it is important that data can be accessed to realise benefits without creating security or privacy issues. Smart devices, such as heating controls, electric vehicles and batteries, must be interoperable, so that they can communicate with each other and the energy system more widely to provide energy services, such a demand side-response, creating new value for consumers and new options for energy system operation.
Service standards must be better: Given low customer satisfaction with current energy suppliers, new businesses that are customer-focused or customer-led offering improved service standards could be more attractive to future consumers.
Solutions must adapt to all consumer situations: Consumers come in all shapes and sizes – rich and poor, homeowners and tenants, young and old – and their situations can change over time. Data will enable energy businesses to understand their customers better than ever before, and it is important that businesses apply insight from this data to adapt to the changing circumstances of their customers and not exploit particular individuals, such as those in vulnerable situations.
Greenhouse gas emissions must be regulated: It is important that carbon emissions are regulated properly to ensure that every energy business is taking actions in line with the UK Climate Change Act and the UK commitment to the Paris Agreement.
Want to know more?
As part of the study, I published a short report summarising these two future energy business models.
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