Changes to the energy industry in Australia in the last 10 years saw the three largest energy retailers – AGL, Origin Energy and EnergyAustralia – challenged by unanticipated and innovative rivals entering the market. The emergence of the second and third tier energy retailers brought a wave of innovation; however, today the pace of innovation has slowed within the sector. Despite opportunities presented by disruptive technologies such as smart meters, solar and batteries, and behind-the-meter systems, energy retailers have not fully leveraged their potential. This apparent lack of appetite for innovation has been attributed to uncertain environmental policy settings and excessive regulation.
Energy retailers are now faced with an imperative to innovate. The looming possibility of price re-regulation, reduction in demand caused by advances in solar, more sophisticated demand management, virtual power plants, rising consumer expectations for lower prices and better service, and the limits of the total addressable market, are challenging energy retailers to adapt in order to sustain growth. Energy retailers will need to consider how to deliver the utility in a dramatically different way, or look beyond selling electricity and gas to brand new streams of revenue.
What is innovation?
There is a sense of confusion around how to define innovation. Is it tweaking your current business model (working in the core), reinventing the way your organisation does business (pushing into adjacent markets) or radically disrupting the entire industry (transformational innovation)? Innovations in the energy sector have too often been driven by the desire to increase operational efficiencies and drive down costs for the business and the consumer. Today, energy retailers need to reframe their approach and aim for the latter – transformational innovation – if they are to effect impactful change and remain viable and relevant.
Where can energy retailers innovate?
There is a common perception amongst energy retailers that the core products – gas and electricity, and the complicated process of selling and distributing to the home – are relatively static and opportunities for innovation are limited. By inverting this mindset and approaching energy from the perspective of the consumer, energy retailers will find opportunities to innovate. The success of Uber is a case in point. Combined with the chutzpah to challenge regulation, its innovative new transport model responded to consumer need: a ride at the tap of your phone, the reassurance of a ratings system, and the promise that anyone with a set of wheels can earn an income. Consumers are still getting from A to B, but in a radically different way that the traditional taxi industry did not foresee.
How to roll out innovation
1. Think outside the box – from the product to consumer
The average consumer does not think of the distribution, delivery and measurement of energy, but of the ‘effect’ on their lives. Energy retailers do not yet service all their needs – meaning there’s an opportunity to fill a lucrative gap in the market. Shift the starting point of business development from product offerings and processes to the consumer, and opportunities to innovate will emerge.
Tip: The ideal innovation process achieves desirability, feasibility and viability. To meet a customer’s desires you must first understand them. Most customers want a warm house when they arrive home, to leave a light footprint on the environment, and to find more money in their pockets every month.
2. Take lessons from the start-up world
The start-up world is renowned for being lean, short on revenue, full of enthusiasm, and resilient in the face of failure. For established energy retailers who do not have an appetite for the failure that comes with trial and error, replicating the processes of start-ups on a smaller scale can be incredibly productive.
Tip: Set up separate incubators for small, experimental projects. Staff these leanly with people from outside the core business, and convince management to redirect some capital to these projects rather than risking the full budget on one larger project that may fail. There is a higher likelihood that one of the small projects will be effective, and can be scaled up once proven.
Start-ups need to be agile to fail fast and cheaply before recalibrating. The normal rules and compliance requirements of an established organisation will slow down and discourage the culture of risk taking and fast pace required to innovate in an incubator. Therefore, energy retailers who want to experiment with innovation need to relax procedures whilst establishing boundaries to protect the wider organisation and its customers.
Tip: Set up a ‘sandpit’ type environment whereby risks can be managed while allowing your team to innovate. Establish your organisation’s individual tolerances in consultation with the executive and board. For example, if a privacy breach in the incubator occurs, how many individuals’ data needs to be lost before the company considers itself in a crisis and at reputational risk? Remember to set metrics to measure how you will gauge the project’s success, and determine when to extend or shut it down.
4. Reframe staff departments and targets
It’s often said that a lean innovation team needs just three people: a hipster, a hustler and a hacker. The people you need for your innovative incubator teams could already be in your business. In fact, some innovative projects emerge organically, but an organisation may need to prioritise the idea over the staff, and ensure the right people are working on the project to exploit its full potential.
Tip: Recruit new staff where current staff are not a fit for the incubator project. Consider how to remunerate and recognise your incubator staff to keep morale and focus high. Will staff be allowed to take a share if their project is a success? What happens to their ‘day job’, and how can new innovation KPIs be set to foster motivation?
Many of Australia’s energy retailers possess the appetite to innovate, if not the structures and processes to do so. With the security of an approach where innovative projects can be tested and trialled on a smaller – and more financially viable scale – we may witness a rise in creative activity and ideas in the sector. Energy retailers willing to listen to the consumer, and test and trial new ideas within more agile structures and teams, may ultimately develop innovative solutions which reinvigorate the energy market.
Pitcher Partners has extensive experience working with energy retailers, and assisting clients through a range of consulting and advisory services, from strategy and planning, digital innovation, change and HR management, to risk consulting, corporate finance and business and tax advisory services. Get in touch with our specialists for further advice and support.