We need a better understanding of business model innovation and adaptation for the utilities of the future

We at the ISE are pleased to announce that Guillermo Pereira, a stellar new postdoctoral scholar from the MIT Portugal program, has joined the team. Guillermo is a best-in-class researcher in the clean energy field, and his dissertation focused on assessment of policy, technology, and business model adaptation for smart and sustainable electricity distribution. His continued scholarly contributions will burnish the reputation of BU and the Institute, both during his time with us and throughout his career. Guillermo will spend the coming months developing collaborative research projects with ISE staff. 


By: Guillermo Pereira

Business models encompass the processes through which value is captured and created in firms. For electric utilities the business model has been stable for decades, focused on using a set of well-known assets and predictable demand to guarantee reliability and quality of service for consumers. However, this business paradigm has come into question as the electricity sector shifts to a cleaner and smarter reality. Cleaner, due to the growing diffusion of renewable energy sources, of which distributed generation from solar has been challenging the traditional use of power sector infrastructure. Smarter, from the upward level of control and monitoring technologies, from sensors that provide consumers feedback on their real-time energy use, to smart appliances that can be remotely controlled and scheduled, consequently driving new consumption behaviors.

Amidst these changes the discussion about the utilities of the future has gained traction, as new ways to create and capture value are identified, business model alternatives are examined, and the associated opportunities and challenges are considered by regulators, utility executives, and consumers. The ongoing transformation can be seen as a process of business model innovation, in which utilities must identify how to continue being relevant players, delivering value, in a rapidly changing industry.

Utilities operate in a capital-intensive, highly technological and regulated environment. Therefore, the debate around the utilities of the future is a debate of adaptation, spanning across policies and regulations, technological, and business model and organizational aspects. Efforts have been devoted to advance regulatory frameworks to consider new uses of infrastructure and the need to invest and integrate innovative technologies. Additionally, technological advancements have contributed to bring smart grids closer to becoming a reality, with cost effective technologies available, giving more control to consumers, and enabling utilities to create value from new sources of flexibility.

As regulatory and technological adaptation unfolds, an important question that needs to be addressed is how adaptable electric utilities corporate structures actually are to implement a new business model, restructure their decision-making processes, deploy a disruptive technology, or launch an innovative service offering. Exploring utilities business model agility can yield relevant insights on the extent to which the transition towards the utility of the future will mostly consist on the adaptation of incumbent utilities currently operating in the electricity sector, if we will see disruption from a wave of new players, or a combination of these and other alternative future scenarios.

Recent findings [1] from a study on technology, business model, and market design adaptation toward smart electricity distribution found that utilities perceive the transformation of the electricity sector as a source of opportunities to expand their activities and introduce service innovation. However, corporate inertia was also identified when considering the integration of new technologies into exiting operations and the use of data as a source of value for introducing new services.

Moving towards a better understanding of business model innovation for the utilities of the future will contribute to the development of enabling conditions that support utilities in overcoming existing technological and strategic path dependencies, consequently supporting adaptation and disruptive innovation. Developing this knowledge will tap into the strategic flexibility of the main players in the electricity sector and contribute with critical information on the ability of the electricity industry to reorganize its technologies, processes, and capabilities.

Utility executives will benefit from these insights by increasing their awareness on their firm’s ability to foresee disruptive change, understand knowledge development needs, and transform existing business structures and processes. For policy makers and regulators this inisghts will be equally relevant, providing information on industry adaptability that can contribute to policy design.

Sources:

[1] Pereira, G. I., Specht, J. M., Silva, P. P., & Madlener, R. (2018). Technology, business model, and market design adaptation toward smart electricity distribution: Insights for policy making. Energy Policy, 121, 426–440. https://doi.org/10.1016/j.enpol.2018.06.018

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