Chalk it up to changing laws, consumer preferences, or stakeholder pressure, but the consequence is the same: the utilities market is transforming. Forbes reports the sector is changing so quickly that utility business models simply can’t keep up and must better answer to modern needs and expectations in four distinct areas. Let’s take a look at how a Refine Search client is adapting its business model accordingly and leading the way.
It should come as no surprise that Forbes highlights environmental performance as a critical part of utility business models. In 2004, Colorado voters passed Amendment 37 , marking the first time in the U.S. that a renewable energy portfolio standard was passed through voters rather than lawmakers. Xcel Energy heeded the call of the people and sprang into action, pioneering a growth and environmental benefits strategy that placed an increasing focus on wind and solar energy. They called their new model “steel for fuel” which diverts the cost of fuel toward the investment in new infrastructure designed to reduce risk and emissions.
The results were quick and clear. Since 2005, Xcel Energy reduced carbon emissions by 35%, sulfur dioxide emissions by 72%, nitrogen oxide emissions by 76%, and water consumption by 40%. They expect to have half of their energy come from renewable sources by 2030. Xcel Energy responded and adapted to that 2004 law by changing how they operate, and because of their focus on environmental performance, they are now leading the nation in wind energy integration and enjoy a strong “buy” recommendation on their stock.
Whereas traditional utility business models focused on reliability, modern models go deeper by focusing on resiliency. Xcel Energy views this on several levels. They educate communities, both through a new outage notification system and app, and by teaching consumers about the dangers of hitting power lines when digging in their yards. They opened a state-of-the-art Cyber Defense Center, and have become experts at risk management and assessment. As a result, Xcel Energy recently enjoyed a year that saw them deliver their best performance ever in system reliability.
“Resilience” also means adapting to today’s changing market in ways that a simple focus on “reliability” could not. Today, 39% of utility companies say their top challenge in changing their fuel mix is uncertainty over market conditions and future regulations, drastically outweighing the more minor challenge of their ability to integrate new energy sources. This is telling, and indicates that utility leaders believe they can change but are afraid to.
The future will always hold a degree of uncertainty, but that is no reason to slow down modernizing a utility business model. Xcel Energy leads the way again here, not just by increasing wind and solar reliance, but by learning from Amazon and Netflix and piloting a time-of-use rate (TOC) program that has won praise and is set to go into effect next year. Whether it’s a subscription rate business model, performance-based regulation (PBR) revenue model, or considering microgrids and distributed energy resources (DERs), there are many different initiatives that a utility company can consider to improve resiliency.
Today’s utility consumer is savvy. Just like people want to know the ingredients in and origin of their food and beauty products, they also want to know where and how their electricity is generated. They desire knowledge and variety, and utility business models that offer energy generated from different sources speak to this. However, Xcel Energy goes further than simply expanding consumer choice and focuses on enhancing the customer experience as a key strategic priority.
Xcel Energy engages consumers and provides convenience, comfort, and control as found in other modern shopping experiences. They’ve succeeded in lowering monthly bills through a model that shifts from recouping up-front fuel costs to investing in the construction of more efficient facilities. Xcel Energy has also become more user-friendly through technology at a time when less than a quarter of utility executives have high confidence in their digital transaction capabilities. This mirrors an in-depth PwC report outlining nine separate utility business models that move from traditional asset-based to modern service-based.
Simply put, innovation should be at the core of everything a utility company does. Given how quickly the industry is evolving, old technologies and methods cannot be relied on. Instead, successful utility business leaders look at the industry with fresh eyes and consider, if they were starting out today, what sort of facility would they build? What technologies would they invest in, and how would they interact with their customers?
Xcel Energy thinks along these lines, on pace to complete 12 new wind farms in the next three years at which point they will be the first energy provider in the country to surpass 10,000 megawatts of wind capacity on their system. They’re doing what it takes to innovate and evolve with the market in forward-thinking ways, using technology to make themselves stronger, easier to use, and cheaper. After all, if auto manufacturers are putting a huge focus on electric vehicles for the future, it makes sense for utilities to review the way they provide electricity and capitalize on the changing market rather than have their business be dictated by it.
It’s easy to talk about changing utility business models, but it’s much harder to actually do it. At Refine Search, we’ve seen how Xcel Energy is leading the way, going outside of comfort zones to deliver for their customers and stakeholders. While there’s no single business model that works for everyone, ones that follow Forbes’ recommendation and are rooted in environmental performance, resilience, expanded choice, and innovation are the future of the industry. It works for Xcel Energy, and it can work for you.
Looking for the leaders who can implement a new business model into your organization? Reach out to Refine Search today.